29 May 2020, NIICE Commentary 4923
Balram Chaudhary
Millennium Challenge Corporation (MCC), also known as Compact, was not matter of controversy until David J Ranz, Assistant Secretary of South Asia at the US State Department, during his Nepal visit in May 2019 said MCC as a crucial part of the Indo-Pacific Strategy. This divided the leaders of the ruling Nepal Communist Party (NCP). A section of leaders led by Puspa Kamal Dahal and Madhav Kumar Nepal are against MCC arguing that it is a threat to primary national interest of Nepal and attack on sovereignty, territorial integrity, and independence of Nepal, whereas, another section of leaders of NCP led by Prime Minister KP Oli and the main opposition Nepali Congress are on the view that the amount of grant will accelerate the development process without infringing primary national interest of Nepal.
MCC and Nepal
The MCC, established in 2004, arouse out of an extensive frustration of the then-existing foreign aid programs. It is based on the premise that economic development succeeds best if it is linked to free-market economic, democratic principles and policies, and where governments are committed to implementing reform measures to achieve such goals. MCC operates two types of assistance programs: a long term and large-scale investment known as compact, and a short-term, more narrowly defined effort to help prepare possible candidates for compact eligibility, termed a threshold program.
Nepal signed the MCC Compact on 14 September 2017. It is a five-year grant agreement and its major goal is to reduce poverty through economic growth in Nepal. The compact life cycle consisting of four principal stages: Candidate Country Evaluation for Eligibility, Compact Development, Implementation, and Compact Closure. Recognizing Nepal’s strong commitment to democracy, economic freedom, and good governance, MCC approved Nepal for its support. MCC and Nepal conducted a diagnostic study in Nepal in 2013-2014 and concluded that the energy and transport sector as two major binding constraints for higher economic growth in Nepal. Based on the diagnostic study, overall political and development potentials, and bilateral relations, MCC formerly selected Nepal directly for the Compact program in December 2014. Nepal and MCC delegation concluded program negotiations in Washington DC in June 2017 and the MCC Board of Directors approved Nepal Compact Program which includes USD 500 million grants in August 2017.
Controversies behind MCC
The prevailing debate over MCC for being a possible threat to Nepal’s primary national interest after the statement of David J Ranz has disintegrated the leaders of the Nepal Communist Party. The major bone of contention, according to party leaders, is that many believe the MCC is part of Washington’s Indo-Pacific Strategy and it has military component.
The early opposition to the MCC was primarily from former Maoist faction, but currently, it is coming also from former UML leaders, with Madhav Kumar Nepal leading the pack. Whereas PM Oli, who leads another section of NCP, and primary opposition Nepali Congress are riveted to ratify it as soon as possible from parliament. For the proper understanding and analysis of Agreement, the central committee of NCP had formed a study team under senior leader Jhalanath Khanal, with foreign minister Pradeep Gyawali and Bhim Rawal, all from the former UML camp, as members. The team suggested the government not to endorse MCC in its existing without the amendment in Eleven-Points of Compact Agreement, arguing that the existing agreement greatly impacts on national sovereignty and the freedom of Nepal and the Nepali people whereas Pradeep Gyawali has claimed this report as deceptive. Amidst controversy, the US is warning to seize aid if Nepal wants revision in agreement. The momentum in NCP has put Oli administration into trouble because he can neither ignore the concerns of his central committee members nor jeopardize Nepal’s relations with the US.
Decoding the Agreement
Article 1 illuminates about the major goals and objectives of compact which is to strengthen good governance, economic freedom, and investment in the people and it can be retained by increasing electricity consumption and upgrading the strategic road network. Similarly, Article 2 clarifies about the funding and resources which amounts to USD 459,500,000 for program implementation and USD 40,500,000 for compact development funding. Likewise, Article 3 explicates about the implementation agreement, the responsibilities of government for the implementation, the accounting, auditing, and reviewing which are crucial during implementation. On further, Article 4 explains that the language of communication and submission of formal drafts between the parties will be English and the representative of the Government of Nepal will be an individual holding the position or acting as Finance Minister and the representative of MCC will be an individual holding the position or acting as Vice President for any purpose. Likewise, Article 5 clarifies about termination, suspension, and expiration which can be done on 30 days prior notice by either of the party. Section 5.2 states that violation of current and future US laws and acts contrary to national strategic interest will result in termination or suspension of the compact by MCC. The leaders opposing MCC argue that Nepal’s sovereignty might be compromised due to extensive provision for being obligatory towards the law to be made in the future as well.
Similarly, Article 6 describes compact annex, amendment, and governing law. The amendment can be made in the specific point of the agreement as mentioned section 6.2 (B) along with that section 6.4 ensure this compact as International agreement and will be governed as per International law. Similarly, Section 6.8 talks about the diplomatic immunity for the staff of the USA working in under the banner of MCC. Article 7 elucidates about ‘Entry into Force’. Section 7.1 states that the compact agreement will prevail over domestic law. This section is another amending point that has been suggested by a central committee of NCP. Similarly, section 7.3 makes clear that compact will enter into force when the government fulfills the domestic requirements and exchange letter with MCC. Finally, Article 8 describes the additional government covenant which states that the government should ensure the full and expeditious cooperation of all relevant Government entities to ensure that all land acquisition, site access, and forest clearance required to implement the Compact is provided on time, and consistent with all MCC policies.
Threat to Primary National Interest?
Nepal is receiving foreign aid since seven decades but development has not able to pick up momentum because of frequent turbulence in politics. Ratifying MCC from parliament will give an agreement the status of international agreement and shall prevail over domestic laws. In formal communication and exchanges between Government of Nepal and MCC, it has been comprehensively clarified that the Constitution of Nepal is inviolable. The leaders have often seen arguing Compact as part of Washington’s Indo-Pacific Strategy and ratifying it will allow the US Military enter into the territory of Nepal but the fact is something else which has been mention in Section 2.7 which makes clear that the disbursed amount will not be used for any military activities. Under Trump administration, MCC might be an important strategy to influence the country through soft power but there is zero probability to conduct military activities in Nepal. Nepal is an underdeveloped state which lacks enough capital to invest in the prioritized field. Ratifying MCC could be a better opportunity for Nepal, on one hand, to receive a lump of aid in grants to invest in prioritizing field, on another hand, strengthening Nepal-US bilateral ties which will further open the gate for the dialogue with the US to attract Foreign Direct Investment (FDI).
Possible Way Out
Nepal should organize extensive discussion and debate on MCC and explore whether it is in the interest of the nation. There is much confusion about MCC among the leaders and scholars due to the complex language used in the Compact Agreement. If the Government of Nepal still, after the extensive open debate, feels that it threatens its primary national interest then negotiation for amendment can be better tools to mitigate this problem. In the condition when the amendment is not possible, Government of Nepal can negotiate for a formal Letter of Exchange with the US which makes the Government of Nepal legally strong.
