A grant assistance of $500 million to Nepal by the United States government through its aid agency Millennium Challenge Corporation (MCC) continues to generate heated discussions in Nepal’s political and economic sectors. The grant agreement, named Millennium Challenge Corporation’s Nepal Compact and signed by the two governments in 2017, requires Nepal to contribute an additional $130 million towards the total project cost of $630 million. As the agreement remains to be ratified by Parliament, the ruling Nepal Communist Party is in the spotlight for its internal strife on the matter.

It is important to understand the vulnerability of the present national economy before beginning to talk about the MCC Compact. It is difficult to predict how badly Covid-19 will impact the global economy in general and the Nepali economy in particular. Nepal’s growth rate for the last fiscal year was estimated to be only 2.3 percent, which is a major setback for achieving the 9.6 percent average annual growth projected in the ongoing five-year national plan that lasts from 2019-20 to 2023-24. The Asian Development Bank has estimated Nepal’s economy will grow by 2.3 and 1.5 percent respectively in 2020 and 2021.

Life without foreign aid

Nepal can hardly think of launching any development initiative without foreign aid in the foreseeable future. The estimated domestic income of Rs948 billion in the current national annual budget can barely meet even the estimated recurrent expenditure of Rs889 billion. Some 24 percent of the budget is expected to be met through foreign aid, of which 20 percent is loans and 4 percent is grants. The World Bank has forecast that foreign aid to Nepal will certainly not reach last year’s level of $1.6 billion. Foreign aid is more a compulsion than a choice for Nepal. It is in this context that the MCC project emerges as a critical choice amid a number of thorny issues to be addressed before putting it into execution.

The project focuses more on building much needed physical infrastructure in Nepal. While 80 percent of the grant assistance has been set aside for the construction of transmission lines, 10 percent has been earmarked for strategic road maintenance. The main arguments against MCC have come from the so-called nationalists.

First, it is argued that the grant is tied to the Indo-Pacific Strategy of the US government, which is said to be part of an American defence strategy in the Indo-Pacific region targeted at balancing out Chinese influence. US officials have also reportedly said that the Indo-Pacific Strategy has a defence component and development aid channelled through MCC can be utilised to support the countries participating in the scheme. Second, it undermines Nepal’s state status because provisions made in the contract will prevail even if they contradict any domestic law. Third, it requires ratification by Parliament, unlike other aid agreements.

The arguments favouring the contract are not less competitive either. First, it is a project with a well-structured and execution committed five-year work plan that meets the real needs of Nepal for the construction of infrastructure to facilitate electricity transmission and thereby promote the import and export of hydropower. It was signed in 2017 before the US articulated its Indo-Pacific Strategy, which is in itself a multi-pillar strategy having more than a military component. Second, the overriding status of the project in relation to the laws of Nepal is misinterpreted. Most aid project agreements can have a provision to ensure that project execution is not affected by changes in the laws and policies of both donor and recipient countries. Thirdly, the need for parliamentary ratification before the project’s execution is to ensure all-party support for smooth project execution and state-level support to negotiate with the government of India in matters of export and import of power through the planned transmission lines.

Whatever the controversies, Nepal has only two choices: to accept the Compact, or to reject it. Each choice has its own pros and cons. Rejecting MCC at this stage is likely to raise questions over Nepal’s credibility in its drive for foreign aid from other prospective donor countries and agencies, besides risking losing already committed aid. Even though Nepal is a non-aligned nation, the risk extends to being labelled even as a China-aligned communist country in the emerging geopolitical situation.

With some amendments

On the other hand, accepting the Compact will shake the power balance between and within political parties. The Nepal Communist Party has decided to go ahead with MCC ratification with some amendments within the already signed agreement. It may still face strong opposition, especially when Nepal cannot make the US government accept the amendment proposals. Both choices continue to have some potential fall-outs in Nepal’s well-proven non-aligned foreign policy.

Practically, it is not but natural for Nepal to reach a middle ground to sort out the MCC dilemma. The Nepal and US governments should be exploring spaces on which both can see a win-win situation. It can be hoped that the US government, being a strong proponent of democracy, can consider accommodating some amendments or further clarifications in the agreement in response to the public outcry so as to facilitate the stalled execution of the project. It may consider making some mutually agreeable amendments and clarifications; and if they cannot be incorporated in the contract, they can be annexed to it as a memorandum of understanding note.

At this stage of the MCC project, there is no way it can be rejected; it would be a wise decision for both Nepal and the US to go ahead with its execution with some changes. Since the Nepal Communist Party, as the ruling party, has decided to move ahead in this direction, the future of MCC hangs on how Nepal proposes changes in it and how the US government responds to it.