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Explained: China-US arm-wrestling in Nepal, played out over $500 million grant

The deal was ultimately approved with an 12-point explanatory note stating that it has no military or security component and nothing to do with the US strategy in the Indo-Pacific — and that Nepal would be free to pull out if the US violated this understanding.

Nepal Prime Minister Sher Bahadur Deuba (Reuters File)

On Sunday night, Nepal’s House of Representatives passed by voice vote the Millennium Challenge Corporation Nepal Compact, a $500 million grant from the US to build power and road infrastructure projects. The biggest American financial pledge to Nepal so far, it was signed more than four years ago, but ratification was delayed by criticism that it undermined Nepal’s sovereignty.

The deal was ultimately approved with an 12-point explanatory note stating that it has no military or security component and nothing to do with the US strategy in the Indo-Pacific — and that Nepal would be free to pull out if the US violated this understanding.

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Two major constituents of the ruling coalition, Pushpa Kamal Dahal’s Communist Party of Nepal (Maoist Centre) and Madhav Kumar Nepal’s Communist Party of Nepal (Unified Socialist), did about-turns and supported the motion after Prime Minister Sher Bahadur Deuba read them the riot act.

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The PM had been warned by the Millennium Challenge Corporation (MCC), and later the US Assistant Secretary of State for South and Central Asia Donald Lu, that failure to ratify by February 28 could lead to termination of the grant and a possible review of the US-Nepal relationship and cooperation — and that the failure would be seen as a result of Chinese influence over Nepal’s policy.

While the ratification by parliament may have given the required legitimacy to the grant, the apprehensions of certain sections of the population continue to pour out on the streets, triggering large scale arrests and curfew in some parts.

Terms of the compact

The deal was signed in September 2017 between the acting CEO of MCC, an independent bilateral foreign aid agency established by the US Congress in 2004, and Gyanendra Bahadur Karki, finance minister in the government that Deuba then headed.

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MCC, which sought to help low- and lower middle-income countries, found Nepal “qualified” for a grant of $500 million, with the recipient having to contribute another $130 million, for power infra projects including a 400KV transmission line, three power substations, and 655 transmission towers along a 315-km route touching India, and a 105-km four-lane road in western Nepal.

Details of the deal were kept under wraps until July 2019, when Dr Yubaraj Khatiwada, finance minister in the K P Oli government, gave notice to the parliament secretariat for its “endorsement”. Although it did not require parliamentary approval, law ministry officials wanted to play safe because of a provision that in the event of a dispute over the law of Nepal and the deal, the latter would prevail.

Controversy over deal

Once in the public domain, the compact stirred a hornet’s nest. Senior leaders of Oli’s ruling Nepal Communist Party said the deal was a sellout and undermined Nepal’s sovereignty and laws by giving the US the liberty to dictate to the country.

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Subsequently, barring Deuba’s Nepali Congress, sharp differences emerged in all parties over the deal — its opponents asserted that besides undermining national sovereignty, the deal also went against the spirit of the non-aligned foreign policy that Nepal has been pursuing, and created conditions for the US to take advantage of the country’s geo-strategic location, sharing a border with China. This view was amplified as China and the US began not-so-diplomatic exchanges on what Nepal should or should not do.

While the question of approval never came before parliament even after the July 2019 notice, it triggered intense infighting in the Communist Party. The deal, along with the clash of personalities among top leaders, ultimately resulted in a split in the party and collapse of the government.

In July 2021, Dahal’s Maoist Centre and Madhav Nepal’s Unified Socialists, both of which were opposed to the MCC deal when they were part of Oli’s government, joined hands with Deuba’s Nepali Congress to form the government. From day one, Deuba was clear that ratifying the MCC compact was in the interest of the country, and one of his top priorities. His message to the two communist parties in the ruling alliance was clear: vote for the approval or leave the coalition.

US, China, India

Critics point out that Nepal is often prompt in signing deals with external donors or friendly countries but does not execute them with the same urgency. An example is China’s Belt and Road Initiative (BRI), for which Nepal signed up soon after the MCC Nepal compact, but no project of which has been executed yet, Dr Mitra Bandhu Poudel, a management expert who has studied the BRI, said. None of the three PMs of Nepal tried to dispel fears around these two deals or to build a national consensus, even as the tussle between the US and China continued.

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Nepal is surrounded by India on three sides and China on the fourth. After becoming PM for the first time in September 2015, Oli took Nepal close to China, retaliating against the months-long economic blockade launched by India to punish Nepal for refusing to defer the promulgation of its new constitution without meeting major demands of the madhesi people who have a close kinship with India.

Earlier in 2005, India mediated in Nepal by bringing all seven pro-democratic parties and the underground Maoists together against the monarchy. It recognised Maoists as true representatives of the people, and lobbied with the West for support of its initiative. In response, China, apprehending that the political and cultural void left by the exit of the monarchy might create trouble in Tibet, its soft underbelly, increased its presence in the north.

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China’s involvement in four key areas — energy, tourism and hospitality, post-earthquake reconstruction, and trade and investment — has increased substantially since then. In recent years, it has begun to openly exercise its influence and preferences in Nepali politics. Ambassador Hou Yanqi has been more visible than the envoys of many other countries in Kathmandu.

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First published on: 02-03-2022 at 04:00:08 am
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