Blog · April 22, 2022

US–China rivalry complicates development aid in Nepal

Authors: Anil Sigdel, SNSPA and Mani Dahal, Kathmandu

On 1 March 2022, Nepal’s coalition government, led by the Nepali Congress party, finally ratified the Millennium Challenge Corporation (MCC)’s Nepal compact, a US$500 million infrastructure and economic development grant from the US government. This marks the end of a chaotic five-year-long saga over the compact’s parliamentary ratification, which saw leaders turn the agreement into a political football.

Anti-US forces — including communists, royalists and pro-Chinese commentators — have united to wage a rhetorical war against the MCC grant. Their deliberate social media disinformation campaigns are disrupting the developmental function of the state and eroding Nepal’s democracy.

For years, Nepal has relied on US developmental aid — for instance, US assistance was critical to rebuilding Nepal after the devastating 2015 earthquake. The Nepal–US bilateral relationship played a role in Nepal’s decision to guide the MCC grant to a definitive conclusion. But with countless visits by US officials since 2012 failing to strike any breakthrough, the ‘take it or break it’ deadline set by the United States for 28 February ultimately made the difference.

Why did it take this long to mobilise parliamentary action in Nepal?

Geopolitically, Chinese Communist Party (CCP) leaders have exhibited ‘deep interests’ in the MCC grant. US diplomat Donald Lu warned that Nepal’s failure to ratify the grant would be seen as ‘Chinese interference’, stating that the United States would ‘review’ Nepal–US ties.

China has engaged in a war of words with the United States, accusing the United States of pursuing ‘coercive diplomacy’ in Nepal and asserting that the MCC has become a ‘Pandora’s box’, not a ‘gift’. China made significant efforts to convince leaders not to accept the grant. In the hours leading up to parliamentary ratification, CCP Foreign Department figures were busy holding virtual meetings with senior Nepal Communist Party leaders, expressing their ‘security concerns’.

Chinese interests and pressure from different interests groups aside, the MCC grant was also victim to inter-party and intra-party feuds. Until the final moment, Nepal’s political parties were fractured in their stance, juggling their options with the upcoming elections in mind. While Nepali Congress leader and Prime Minister Sher Bahadur Deuba was determined to ratify the grant, his coalition partners were still opposed.

Nepal’s communist parties feared that siding with Deuba would compromise their chances in the elections. While leaders hoped that the MCC grant would fail, they weighed up the consequences — if ratified before the coming election, the grant’s legacy and blame would be shared. Communist Party of Nepal (Maoist Centre) spokesperson Pushpa Kamal Dahal has relied on doublespeak to balance the opposing pressures from his party cadres to reject the grant and the external constraints to accept it.

Prime Minister Deuba feared that any break-up of the coalition would hamper his party in the elections. But with help from former prime minister and opposition party leader KP Sharma Oli — who registered the MCC bill in parliament during his term — Deuba’s fears were alleviated and Oli’s Communist Party of Nepal (Unified Marxist–Leninist) did not block the grant’s ratification.

The MCC grant was ratified along with an interpretative declaration outlining the government’s understanding of its obligations under the MCC to allay fears and suspicions. The United States has indicated that Nepal’s interpretative declaration is not a problem and agreed to move the implementation process forward. Given the sheer amount of misinformation on social media, these provisions eased domestic fears, while saving face for the political parties and increasing their political gains.

During a visit to Kathmandu on 25–27 March, Chinese Foreign Minister Wang Yi proposed greater cooperation through on projects related to China’s Belt and Road Initiative while avoiding mention of the MCC. Nepal also engages in projects funded by the China-led Asian Infrastructure Investment Bank and China’s International Development Cooperation Agency. India has chosen to remain silent — as an important US partner and a hostile neighbour of China, it is unable to express any of its reservations publicly.

The MCC grant now amounts to US$630 million as the Nepali government has agreed to invest US$130 million on top of the US grant of US$500 million. The development plans are in line with Nepal’s policy of modernising electricity and transport infrastructure in the mountainous nation. But it remains to be seen if the project will move forward as expected and yield anticipated results.

Anil Sigdel is the founding director of Nepal Matters for America in Washington DC and an Associate Professor of International Relations at the National University of Political Studies and Public Administration (SNSPA) in Bucharest, Romania.

Mani Dahal is a journalist based in Nepal.