China’s Bid To Stop Nepal From Accepting 500 Million Dollar US Grant Fails, But The Dragon Lurks Dangerously In The Shadows

Nepal Parliament’s ratification of a $500 million US grant after four-and-half years’ delay represents a setback to China, albeit a temporary one. Beijing, which had tried to scuttle Nepal’s acceptance of the grant, will redouble its efforts now to establish its hegemony over the Himalayan country.

The grant by the US Government’s Millenium Challenge Corporation (MCC) is meant to improve roads and power transmission lines in Nepal in a bid to spur investments, accelerate economic growth and reduce poverty.

The MCC signed an agreement with Nepal in September 2017 to provide the grant. But the MCC-Nepal Compact ran into rough weather with China’s primary surrogates in Nepal--the Communist Party of Nepal (Maoist Centre) or CPN(MC), and the Communist Party of Nepal (Unified Marxist-Leninist) or CPN(UML)--opposing the ratification of the agreement by the country’s Parliament.

The MCC makes it binding on countries availing of its grants to get approval from their respective parliaments. MCC grants also come with some strings attached and incorporate very strict oversight mechanisms to prevent misuse, leakage or diversion of the grants.

The process of getting this grant was initiated way back in 2006 when Nepal received a letter from the MCC inviting its representatives for a meeting in Washington. The MCC then decided to study Nepal’s fiscal management to decide if it is eligible for a grant.

Four years later, in 2010, the MCC completed its study and Nepal formally applied for the grant. The MCC Board approved Nepal’s request in December 2014 and the MCC opens its office in Kathmandu in 2015. After the MCC Board approves the USD 500 million grant to Nepal in August 2017, the two sides ink the MCC-Nepal compact.

But China, which was keen on bringing Nepal into its sphere of influence, mounted a covert campaign to influence public opinion in the Himalayan country against the grant. Through its political surrogates, NGOs that it funds and its retainers in Nepal’s academia, bureaucracy and civil society, Beijing mounted a massive anti-MCC and anti-US drive.

Through this covert and concerted campaign, Beijing succeeded in spreading a number of falsehoods about the grant. People of Nepal were led to believe that the MCC would supersede Nepal’s Parliament while overseeing the utilisation of the grant and that Nepal would be forced to become a part of the USA’s Indo-Pacific strategy that is aimed against China.

It was also said that by agreeing to take the grant, Nepal would lose its sovereignty and would have to do Washington’s bidding. Nepal would have to agree to stationing US troops on its soil and a permanent US air base would also come up in the country. And, thus, Nepal would be drawn into US-China rivalry. People of Nepal were also led to believe that the MCC grant was a counter to China’s Belt and Road Initiative (BRI).

Opposition to the MCC grant, thus, gained strength in Nepal. The two communist parties, which had merged to form the Nepal Communist Party (NCP) at Beijing’s behest--the merger was annulled by the Supreme Court even as it was unravelling due to ego and power plays among its top leaders--led the opposition to the MCC grant.

In December 2019, the NCP’s standing committee demanded clarification from the USA on the nature of the grant. And in February 2020, the NCP formed a three-member task force to study the grant. The task force submitted its report at the end of that month suggesting that Parliament should not ratify the grant agreement “in its present form”.

The US started piling pressure on Nepal’s political leaders after that. In June 2020, the US embassy in Nepal said that availability of the MCC grant is not open-ended. US officials communicated to Nepal’s politicians that they have to decide on the grant one way or the other.

In early September last year, the Nepal government wrote to MCC outlining concerns about the grant. The MCC Board replied within five days allaying those concerns and clarifying that the grant would in no way compromise Nepal’s sovereignty or undermine its Parliament and government.

That same month, a high-level MCC delegation led by its vice president Fatema Z Sumar travelled to Kathmandu and met Nepal’s top politicians to address their concerns--mostly unfounded--about the grant.

But even after all this, Beijing’s surrogates in Nepal continued to step up their campaign against the grant. An exasperated US then delivered a stern message to Kathmandu in November last year: take it or leave it.

As pressure started mounting, Prime Minister Sher Bahadur Deuba started hectic parleys with his coalition partners--the CPN(MC) and Communist Party of Nepal (Unified Socialist) or CPN(US), a breakaway faction of the CPN(UML)--to get them on board to ratify the grant in Parliament.

Deuba also reached out to his predecessor Khadga Prasad Sharma Oli (the chief of the CPN-UML) who had supported the grant when he was in power but adopted an ambivalent stand once his government fell. With Pushpa Kamal Dahal (chief of the CPN-MC) and the CPN(US) being publicly opposed to the grant, Deuba figured he would require Oli’s help to get the MCC-Nepal Compact ratified in Parliament.

The US kept up its pressure on Nepal’s politicians and in early February, a senior US State Department official called up Deuba, Dahal, Oli and top leaders of other political parties warning that failure to ratify the grant by February 28 would jeopardise US-Nepal ties, adversely affect other US aid and also US investments in Nepal. Nepal, he cautioned, would have a lot to lose.

Beijing took umbrage at this and even mocked the US for forcing Nepal to accept what Washington itself termed as a “gift” to the people of Nepal. Gifts, said China, should not be forced on anyone. China also issued statements calling on the US to respect Nepal’s sovereignty.

Chinese foreign office spokesperson Hua Chunying criticised Washington’s “coercive diplomacy” and wondered how the US could set a deadline (February 28) for Nepal to accept a “gift”.

Behind the scenes, Beijing pressured Nepal’s politicians not to ratify the grant. Song Tao, the Minister of the International Liaison Department of the Central Committee of the Communist Party of China (CCP), had a long virtual meeting with Oli late last week. Tao reportedly urged Oli to vote against the ratification of the grant.

Last week, vice-minister of the International Department of the CPC Central Committee, Chen Zhou, also had a lengthy talk with CPN(US) chair Madhav Nepal. Zhou urged Nepal, whose party is a constituent of the ruling alliance, to prevail on Prime Minister Deuba to abandon the process of ratification of the grant in Parliament.

Deuba was faced with the prospect of the ruling coalition falling apart due to fierce opposition to the grant by his alliance partners--the CPN(MC) and CPN(US). It was widely believed that these two parties would vote against the grant, while Oli would watch from the sidelines and would be happy to see the government fall and fresh parliamentary elections--something he had been advocating since last year--be conducted.

The US also let it be known to Nepal’s political leadership that failure to accept the grant would lower their country’s standing in the Western world. “The hint was loud and clear: the US would view Nepal’s failure to ratify the grant as succumbing to pressure from China. Nepal would thus come to be viewed as a client state of China and, thus, ineligible for Western largesse that this impoverished country depends a lot on,” said political analyst Nitin Bishwakarma.

Ultimately, Nepal’s bickering politicians saw reason and, quite dramatically, quietly dropped their opposition to the MCC grant. Prime Minister Deuba, who held multiple rounds of meetings with his allies as well as Oli, ultimately succeeded in not only ratifying the grant, but also saving his government.

The ratification on Sunday, with just a day to go for the expiry of the February 28 deadline, caught China unawares. Beijing issued a terse statement (read this) stating that it had “noted” the ratification of the MCC grant by Nepal’s parliament.

Chinese foreign ministry spokesperson Wang Wenbin said Monday: “China has stressed repeatedly that international formal cooperation should follow the principle of mutual respect, equal treatment and fully respect the sovereignty of the country concerned and the will of its people”.

The US, he added gratuitously, “should not interfere in other countries' internal affairs to engage in coercive diplomacy, undermine other sovereignty and interest out of selfish interests”, adding that Beijing always supported Nepal choosing an independent path of development.

China has clearly lost this round in its power game in Nepal. But it surely won’t sit idle nursing its wounds. Beijing will, in the coming months, egg its surrogates to mount opposition and derail the road and power projects that will be funded by the MCC grant.

If past experience is anything to go by, China will encourage and even finance opposition to these projects. It will ask its surrogates in academia and civil society to mount a campaign against the projects and will get its communist proxies in Nepal to launch agitations against them.

The US would do well to guard against such plans. The only way to ensure smooth completion of the projects that will benefit Nepal immeasurably will be to deepen its engagement with the Himalayan country.

The US has to strengthen its interactions with Nepal’s civil society, bureaucracy, academia, military, the legal and business communities and others. India also has an important role to play here since it is in India’s interests to limit China’s influence in Nepal.

The MCC-funded projects in the power sector will benefit India, with transmission lines to be erected till the India-Nepal border to facilitate export of power by Nepal to India. Hence, it is in India’s interest to ensure that the projects are completed in time.

China is a common adversary for both US and India, and while New Delhi would not like Washington to expand its footprints too much in Nepal, it is in India’s interests to help US stave off China in Nepal now.

The ratification of the MCC grant is but another round in the continuing power games being played in Nepal primarily between the US, India and China. Its ‘advantage US’ in this round, but the dragon is lurking large in the shadows, eager to pounce at the first opportunity and derail the MCC-funded projects.