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The controversy around the $500 million MCC grant to Nepal
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What is the MCC? Why are domestic parties opposing economic assistance from the U.S.?

March 01, 2022 10:30 am | Updated 10:30 am IST

Violent protests: Demonstrators burn tires during a protest against the $500 million MCC grant near the parliament in Kathmandu on February 27, 2022.

Violent protests: Demonstrators burn tires during a protest against the $500 million MCC grant near the parliament in Kathmandu on February 27, 2022. | Photo Credit: REUTERS

The story so far: On February 27, the Nepal parliament approved the Millennium Challenge Corporation Nepal Compact — a $500-million grant from the United States for electricity transmission and road development projects, after five years of keeping it on hold. The grant was ratified with an imperative declaration attached to it.

The declaration states that the U.S. grant is not part of the Indo-Pacific strategy and Nepal’s Constitution would be above the provisions of the grant agreement. It also mentions that the grant will solely be perceived as an economic assistance. Political parties and civil society have been divided on the U.S. grant for various reasons. 

The grant agreement, which was tabled in the Parliament in Kathmandu on February 20, faced demonstrations against it, which turned violent, with riot police firing tear gas shells and using water cannons to disperse the protesters outside the parliament. Protestors also hurled stones at the police and several people reported injuries on both sides. 

What is the Millennium Challenge Corporation? 

The Millennium Challenge Corporation (MCC) is an independent U.S. foreign aid agency, which was established in 2004 by the country’s Congress to offer “time-limited grants promoting economic growth, reducing poverty, and strengthening institutions,” to low and lower-middle income countries through a selection process.

While this is the current official definition of the aid body, MCC was proposed by the George Bush administration post the 9/11 terrorist attack, as a tool to counter global poverty and international terrorism, citing the rationale that poverty and terrorism are linked.

MCC selects countries to award grants through a selection process, which involves evaluating the country’s performance on 20 policy indicators ranging from control on corruption to government effectiveness.

The MCC offers assistance in three forms. In the form of compacts, meaning large, five-year grants; concurrent compacts or “grants that promote cross-border economic integration”, and threshold programs, which are smaller grants aimed at policy reform. The aid being offered to Nepal is in the form of a compact; the MCC has so far approved about 37 compacts for 29 countries, worth a total of over $13 billion.

What is the MCC Nepal Compact? 

In 2014, after meeting 16 of the 20 policy indicators on which MCC selects countries, Nepal had qualified for a compact, the agreement for which it later signed in 2017. 

Under the compact, the U.S. government, through MCC, would provide a grant of $500 million to Nepal for energy transmission and road development projects, with the latter also chipping in $130 million from its exchequer. The power project proposed in the compact is a 300-400 km long energy transmission line with a capacity of 400 kilovolt, along a power corridor starting from the northeast of Kathmandu and ending near Nepal’s border with India. The project also involves building three power substations along the line. Besides, the grant money is also intended for a ‘road maintenance project’ which will upgrade roads on the east-west highway, spread across 300 kms. 

While the compact says the energy project is meant to augment power generation and economic growth for Nepal, it also states that it will facilitate cross-border electricity trade with India. 

Before the work on the projects can begin however, the bill has to be formally accepted or ratified in the country’s parliament. Both the U.S. and Nepal governments have said that it is a ‘no strings attached’ grant, which would not have any conditions, or require repayment and interest payment. However, section 7.1 of the agreement says it will “prevail” over the domestic laws of Nepal and section 6.8 grants immunity to MCC staff in “all courts and tribunals of Nepal.” The U.S. Embassy in Nepal described the compact this month as a “gift” from the American people and a “partnership” between the two countries that will “bring jobs and infrastructure to Nepal and improve the lives of Nepalis.”

What is the dispute around the MCC grant? 

As per the initial agreement, the compact should have come into effect by 2019, but skepticism, politics and now protests, made its course rocky.

The U.S. had been increasing its pressure on Nepal to ratify the agreement, with the Biden administration’s Assistant Secretary of State for South and Central Asia, Donald Lu, calling the Nepal Prime Minister Sher Bahadur Deuba on February 10, giving a deadline to ratify the MCC compact in parliament by February 28, or the U.S. would have to “review its ties with Nepal.” There have been instances in the past where the U.S. has terminated such compacts with countries for different reasons. 

Nepali political parties have been divided on the MCC agreement over fears it would undermine Nepal’s sovereignty by pulling it into ohe US’s Indo-Pacific Strategy (IPS), which focuses on countering China-- a country Nepal has close ties with. The compact is also seen by some observers as America’s answer to China’s Belt and Road initiative, a road development program that the Nepal government signed in 2016. 

In May 2019, U.S. State Department’s Assistant Secretary for South Asia, David J Ranz, on his visit to Nepal had said that MCC was an important part of the IPS. Besides, the US’s November 2019 report clearly states that assistance under the MCC compact is a part of IPS. This further strengthened the skepticism of some of Nepal’s parties, that the compact would go against its constitution, which binds the country to a strong principle of non-alignment. 

After Nepal received the call from the White House about the deadline, China said it opposes “coercive diplomacy and actions that pursue selfish agendas at the expense of Nepal’s sovereignty and interests.” The people of Nepal are also afraid that the MCC would make profits from the power project by exporting energy to India. Besides, the call that Donald Lu made to Nepal about meeting the ratification deadline, was made when he was in Australia to attend the Quad meeting. This has led to skepticism that the MCC agreement, involving cross-border energy trade with India, would also benefit the Quad, which has often spoken about making infrastructure partnerships in India’s neighbourhood, including Nepal, Maldives and Sri Lanka. 

How has the pact played out in Nepal politics? 

Nepal has been witnessing bouts of political instability after the 2017 national election, when the leader of the Communist Party of Nepal (UML), K.P Oli and Pushpa Kumar Dahal (Prachanda) of Communist Party of Nepal (Maoist) formed a coalition government, with Mr. Oli as the Prime Minister. This Government had a power sharing agreement under which Mr. Oli and Mr. Prachanda would assume the post of Prime Minister for two equal periods of time. This agreement did not work out and as a result, the country’s parliament was dissolved twice -- first, in December 2020 and then in May 2021, with fresh elections scheduled for November 2022. In July 2021, however, the Supreme Court of Nepal, ordered that the parliament be reinstated with Mr. Oli’s rival Sher Bahadur Deuba of the Nepali Congress as the Prime Minister. In this political backdrop, the MCC compact became politicised by parties as a device to strengthen their positions in the upcoming elections. While the two communist parties in the leading coalition, including Mr. Prachanda’s party have been against the MCC compact, the PM’s party Ne endorsing it. M

THE GIST
On February 27, the Nepal parliament approved the MCC Nepal Compact — a $500-million grant from the U.S. for electricity transmission and road development projects. The declaration attached to it states that the U.S. grant is not part of the Indo-Pacific strategy and Nepal’s Constitution would be above the provisions of the grant agreement.
Under the compact, the U.S. government would provide a grant of $500 million to Nepal for energy transmission and road development projects. The power project proposed in the compact is a 300-400 km long energy transmission line with a capacity of 400 kilovolt. The project also involves building three power substations along the line.
Nepali political parties have been divided on the MCC agreement over fears it would undermine Nepal’s sovereignty by pulling it into the US’s Indo-Pacific Strategy (IPS), which focuses on countering China-- who Nepal has close ties with. It would also go against the country’s policy of non-alignment.

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