Nepal Ratified the MCC Compact. What Now?

How will the U.S. grant – approved despite a raging controversy – factor into both upcoming elections and Nepal’s diplomatic positioning?

Back in 2017, when Nepal formally accepted the $500 million grant under the U.S. Millennium Challenge Corporation (MCC) to improve its power and road networks, few could have foreseen the chaos outside the parliament on February 27, 2022, the day Nepal’s parliament ratified the MCC Nepal Compact.

On that fateful Sunday, an estimated 1,500 protestors surged toward Nepal’s Federal Parliament in Kathmandu, the national capital, just as they had been doing on and off for the previous few weeks. To disperse the unruly, stone-pelting mob, the police had to fire rubber bullets and deploy water cannons and tear-gas.

Sporadic protests, some of them violent, continue across the country two weeks later.

Five years ago, there was little controversy over the agreement. Many Nepalis saw it as bringing easy, interest-free money for their country’s development. The whole project under the grant would have to be done and dusted in five years, or the compact would be abrogated. But, if successful, it would be a rare infrastructure project in Nepal completed within the estimated time and budget, setting a wonderful precedent.

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But as I wrote in my last piece for The Diplomat, some American officials then started linking the compact to the United States’ Indo-Pacific Strategy (IPS). Nepal’s hardline communists latched onto their statements and began portraying the pact as a part of the larger U.S. proxy war against China, Nepal’s mighty northern neighbor. China was only too happy to fan these anti-compact flames. Social media soon ignited an inferno, as fake news of the deal opening the doors for the entry of the U.S. military into Nepal caught on like wildfire.

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Soon, the whole country was bitterly divided over this bilateral grant agreement.

In the final parliamentary vote on the compact, four of the five biggest parties in the ruling coalition led by Prime Minister Sher Bahadur Deuba’s Nepali Congress voted in its favor. The main opposition and biggest party in Parliament – the Communist Party of Nepal-Unified Marxist-Leninist (CPN-UML) – chose not to take part in the voting. Nonetheless, CPN-UML, which has been obstructing the House of Representatives for months on end over separate issues, was also batting for the deal.

But parliamentary ratification is only a step toward the compact’s implementation. Land acquisition and securing the right of way for the electricity transmission lines to be built under the compact have only just started. Historically, land disputes on big infrastructure projects have been the trickiest issue to resolve in Nepal. But should things go as planned, the compact will enter into force in around a year-and-a-half. After that, the project has to be completed within five years.

The Electoral Calculus

Even amid the raging MCC controversy, the government had announced local level elections for May 13, to be followed by provincial and federal elections. But many in the ruling coalition are now in favor of dissolving the Parliament and jumping straight into federal polls.

Some analysts believe the compact debate will have little impact on elections, whenever they take place.

Local elections seldom feature larger national or international issues. They turn more on personal connections and local concerns.

Even in the case of provincial and federal elections, political analysts think the controversy’s impact will be minimal. All of Nepal’s major parties backed the compact. Deuba’s ruling coalition partners – the Communist Party of Nepal (Maoist Center) and the Communist Party of Nepal (Unified Socialist), both of which had earlier been resisting parliamentary endorsement – had to give in to Deuba’s dogged stand on endorsement.

The ruling parties got the Parliament to pass an “interpretative declaration” along with the main MCC bill. Basically, the declaration says Nepal will strictly adhere to the compact’s letter and should the Americans try to pull any dirty tricks, the compact will be swiftly abrogated.

But this sop for the two communist parties in the ruling coalition could be electorally meaningless.

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“Nepal’s national politics is largely an interplay between Nepali Congress and CPN-UML,” says Tula Narayan Shah, a political analyst. “Even though one is in the government and the other in the opposition, both in the end stood in favor of the compact’s endorsement. So neither of them can use the issue to demonize the other in upcoming elections.”

At the forefront of the anti-compact protests are small hard-left outfits without the organizational strength to electorally challenge big parties like Congress and CPN-UML. Just as importantly, in Shah’s reckoning, the MCC compact is a non-issue for the Madhesis, the natives of the country’s flatlands who constitute a third of Nepal’s population.

But if there is one party that could suffer from the MCC controversy, “it would be the ruling Maoists,” Shah says. Maoist Center leader Pushpa Kamal Dahal, the once awe-inspiring commander of the Maoist guerrillas, was seen as playing a dubious role. While he wrote to the MCC headquarters in Washington, D.C. assuring full support for the compact, back home he was rousing the Maoist rank and file against the “imperialist” project.

In order to attract communist votes – traditionally nearly half of the Nepali electorate – CPN-UML could use the compact controversy to portray the Maoist party and Dahal as unreliable faux-communists who talk big but are ever-ready to compromise on national interest for partisan gains.

Patriots vs Nationalists

Ameet Dhakal, another widely read political commentator, offers a nifty twist on Nepal’s emerging political narrative. Speaking in the parliament ahead of the vote, Gagan Thapa, a charismatic Nepali Congress leader, had challenged the compact’s “ultra-nationalist” opponents.

Criticizing an earlier communist speaker who had portrayed the deal’s backers as “traitors,” an animated Thapa pointed out the difference between nationalists and patriots. “While fake nationalists let other people fight and die for their cause, the patriots are ready to lay down lives for their beliefs. I am a patriot,” he thundered.

Analyst Dhakal sees this as astute positioning on the part of Nepali Congress. “Now the Congress will try to project itself as a patriotic force that is pitted against the two-faced ultra-nationalists,” Dhakal says. This, he says, could be a canny electoral strategy.

The MCC debate percolated down to the grassroots and many Nepalis believed the communist hardliners when they took a principled stand against the American pact. “But people were disillusioned when they saw how easily these principles were sacrificed for political gains,” Dhakal says. After the compact’s implementation, they will also see that the U.S. Army is not invading their country, as they had been led to believe. Instead, better power transmission lines and road networks constructed under the MCC projects will ease their livelihoods.

This is why, says Dhakal, the compact’s near-unanimous ratification could be a “game-changer” in how Nepalis evaluate their politicians – with the likes of Dahal and CPN-UML’s Bhim Rawal, who were dishonest in their messaging over the compact, taking the biggest blows to their reputation.

On the other hand, Nepali Congress leaders have gotten a second wind. Pushpa Bhusal Gautam, a Nepali Congress MP and member of the Federal Parliament’s International Relations Committee, says the ratification has sent an uplifting message: that Nepal’s quarreling political parties are capable of mending fences on matters of national interest.

“But if not for the resolute stand of Nepali Congress and its President [Sher Bahadur Deuba], the deal could not have passed,” she says. “This has buttressed the public image of Congress and its leadership.”

Dhakal, the political analyst, agrees. He sees the compact’s endorsement as a political victory for Deuba, who had been pushing it at great personal risk. The seemingly inarticulate and incompetent prime minister, Dhakal adds, “suddenly appears to be a master tactician and a unifying figure.” This elevation in its leader’s status could serve Congress well in upcoming elections.

‘Ominous’ Geopolitical Games

Whatever the compact’s impact on upcoming elections, things are less certain on the geopolitical front for Nepal.

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Considering how difficult it is to implement foreign projects in Nepal, “the Americans will want to ensure a favorable government is at the helm for the next five years,” says Lila Nyaichai, a former MP and international relations scholar.

Echoing her view, a recent op-ed in China’s Global Times noted how Washington had “successfully cultivated pro-U.S. forces in Kathmandu” and that “a clear shift can be seen in the divergence of the attitude [from pro-China to pro-U.S.] among Nepali politicians and media regarding the MCC deal recently.”

A follow-up editorial in China Daily was blunter still, warning Nepal that “the consequences may be serious should any part of the compact be used against neighboring China.” With China committed to Nepal’s development, the editorial went on, “it is in Nepal’s best interest to stay out of the U.S.’ geopolitical games.”

The Chinese no longer trust Nepali leaders, says Nyaichai, many of whom had promised the compact’s failure. China is unhappy for other reasons too: the breakdown of the Nepal Communist Party that it helped forge, the lack of political zeal in Kathmandu to push key Belt and Road Initiative (BRI) projects, and the current Nepali leadership’s apparent anti-China bias.

The Deuba government is yet to appoint an ambassador to China even as it has already nominated envoys to India and the United States. A government panel has also accused China of encroaching on Nepali territories.

China has in turn only partly opened its two main border points with Nepal. It has also shown no interest in taking back hundreds of Nepali students enrolled in Chinese universities, who remain stranded in Nepal because of China’s strict anti-COVID-19 measures.

Chinese Foreign Minister Wang Yi is expected to visit Nepal at the end of March to sort out some of this mess. While in Kathmandu, he is likely to seek assurances that the compact’s passage will pose no security threat to China and to prod Nepali leadership on the mothballed BRI projects.

The Americans have also not come out of the compact controversy unscathed. The hectoring tone of their officials has offended many. One top U.S. official had even warned that if the Nepali Parliament rejected the agreement, it would be seen as having been done at China’s behest. In that case, the official said, the United States would “review” its relations with Nepal.

Gopal Khanal, foreign policy advisor to former Prime Minister K.P. Oli of the CPN-UML, concedes that the Americans could have been more diplomatic and more careful about preserving their democratic image. But he says China’s image in Nepal has suffered even more.

“The Chinese were sure the compact would not be ratified. But as the atmosphere for its ratification built, Beijing took its gloves off and started punching out one after another blunt statement on the perceived U.S. intervention in Nepal,” he says. “This new U.S.-China cold war that we see developing in Nepal is ominous.”

Unlike some optimists, Khanal says the protracted MCC debate has done considerable damage to Nepal’s image and the country may struggle to get financial help in the future. Nor will the compact’s opponents – China and its traditional communist constituency in Nepal – accept their defeat easily.

The agreement’s ratification may not significantly affect the next round of elections. But one thing is certain: the China-U.S. geopolitical tug-of-war in Nepal is set to intensify, polarizing Nepali politics for years to come. The fragile political consensus on the MCC compact is already fraying.