A grant contract worth $500 million between the US’s Millennium Challenge Corporation (MCC) and the Nepal government has been left unendorsed by Parliament, even though this was a prerequisite built into the contract itself. The Nepal Communist Party, the ruling party, failed to reach an internal consensus to endorse this contract, which has resulted in this failure.

It is not that the current government did not want this MCC Compact to be ratified. In fact, the current government had left no stone unturned to reach bipartisan support for this project. However, not convinced with some of the articles, some of the lawmakers from the majority party itself have created a clear obstruction, stating that the sovereignty of the nation is at stake.

The debate surrounding the MCC Compact has reached a new level of ubiquity. Every person in Nepal seems to have taken a side over it. The supporters, mostly economists, are stating that this contract is nothing more than a typical grant, with no correlation to the country’s sovereignty. The critics, however, are not convinced, and claim that some of the articles and provisions in the Compact are unconscionable. Some go so far to attack the duration of the agreement—meaning that the Millenium Challenge Corporation can work in Nepal for eternity—or the very fact that it requires parliamentary ratification to make it legitimate.

The polarisation has reached a point that we can see some arguing that the MCC Compact is the only key to development while others see it only as a legal and political attack on national sovereignty. Of course, every coin has two sides; this contract also has both positive and negative aspects. While an argument as to why this Compact is important has been thoroughly covered before, it is also important to dissect this grant with a comparison to another common form of foreign funding—debt.

There is no such thing as a free lunch

Debts and grants are two instruments of external support used in the course of the development process. But they are very different from each other. Developing and developed countries use debt to finance their projects. On the other hand, poor countries seek grants to a larger extent. It is because the grant is perceived as a free source of funds from developed nations. However, there is an aphorism in economics which states that ‘there is no such thing as a free lunch’.

Both the debts and grants have their own costs associated, but grants most of the time have more implicit or hidden costs. Debts are loans that governments take from foreign counterparts, with explicitly stated added remuneration expected, known as interest. Grants on the other hand, do not have any explicit returnable amount attached to them. But the conditions imposed on the approval or acceptance of the grant can be viewed as a cost. When such implicit costs are there, we are no freer to make our own decisions. Yet, it is solely up to the receiver whether to accept such clauses or not.

The problem here in Nepal is that debt has not been understood rationally. Policymakers have notoriously misused available debt so far. This has caused hesitation among the public, particularly when they see figures for debt per capita published. But, in reality, debt is one of the most ingenious inventions that has come from the field of economics. Had there been no debt, the world would not have grown at the pace that it has.

In the case of Nepal, we have a larger room to flourish with debt. The country’s debt to GDP ratio is considerably low. According to the World Bank, Nepal’s public debt is about 30 percent of GDP. Out of it, only 17.4 percent is external debt. Similarly, the IMF Debt Sustainability Analysis (DSA) shows that Nepal’s debt sustainability is very strong. These statistics show that Nepal has a larger room available to finance development projects. This means that, compared to African countries that have been ensnared in a debt trap, Nepal has much more room to accept more financing. Nepal outperforms countries currently facing a debt trap in most development indicators, be it the case of human development indicators and intellectual capital, the natural resources, the investment possibility, political system, among others.

Debt only becomes a headache for the development process when policymakers start botching it, as is currently the case in Pakistan. Yet, used appropriately, debt not only uplifts the economy but also keeps national interests intact.

Targeting the wrong issue

At this point, many may begin to wonder whether grants are needed at all, particularly if external sources of financing are available. To answer this, we have to analyse our political and economic system.

Without foreign capital investment and an inflow of technology and knowledge, it is difficult for Nepal to grow as targeted. Yet, it is not that Nepal does not have the ability to develop without grants. Take the MCC Compact for example. This grant contract, worth $500 million, amounts to 1.7 percent of Nepal’s GDP and to 4 percent of the budget for the current fiscal year. Therefore, on paper, Nepal is economically sound enough to fund the projects under question using taxpayer money or by issuing public bonds.

But the question is whether Nepal can manage this fund without supervision at all, and execute and implement important projects. In recent history, the country has failed to utilise vast funds effectively, unscrupulously distributing billions of rupees through the Prime Minister’s Employment Programme or through constituency development funds allocated to each federal and provincial lawmaker. Similarly, the current report from the Financial Comptroller General Office has reckoned that the government’s unaccounted transactions reached a whopping Rs664 billion last year. This is as high as 21 percent of the GDP. What can be construed from these statistics is that the poor development in Nepal is not due to the unavailability of funds, but rather the misuse of available resources.

It does not matter whether a development fund is coming in the form of a debt or a grant. Unless strong control mechanisms are deployed, Nepal will continue to stagnate. The entrenched syndicates, a major source of the sustained corruption, need to be uprooted, and politicians must be held accountable for their support of, or opposition to, any form of investment or support. The MCC Compact is not the game-changing grant it has been made out to be. Neither is it particularly harmful. Nepal must focus on direct investment opportunities, and must not be afraid to take on more debt. But most importantly, it needs to understand the real cause behind its underdevelopment, which is not centred around external support.

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