Millennium Challenge Corporation (MCC): Nepal, USA and Indo-Pacific

  • IASbaba
  • March 4, 2022
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  • GS-2: India and its neighbourhood
  • GS-2: Effect of policies and politics of developed and developing countries on India’s interests

Millennium Challenge Corporation (MCC): Nepal, USA and Indo-Pacific

Context: On February 27, the Nepal parliament approved the Millennium Challenge Corporation Nepal Compact — a $500-million grant from the USA, 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? 

  • USA’s Foreign Aid Agency: 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 (based on performance on 20 policy indicators)
  • Terrorism and Poverty: 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 offers assistance in three forms. In the form of compacts, 
    • Large, five-year grants; 
    • concurrent compacts or “grants that promote cross-border economic integration”, 
    • Threshold programs, which are smaller grants aimed at policy reform. 
  • 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 Nepal also chipping in $130 million. 
  • 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 Nepal’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.” 

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 giving deadlines, 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 the 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. 
  • There also concerns that the compact would go against its constitution, which binds the country to a strong principle of non-alignment. 
  • The people of Nepal are also afraid that the MCC would make profits from the power project by exporting energy to India. 
  • 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.” 
  • In this political backdrop of instability amongst coalition partners, the MCC compact became politicised by parties as a device to strengthen their positions in the upcoming elections.

Connecting the dots:

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