By: Migena Satyal
The Federal Democratic Republic of Nepal lies between India and China in the heart of South Asia. Despite being surrounded by the two emerging superpowers of the twenty-first century, Nepal finds itself lagging economically and is one of the least developed nations in the world. As of 2020, Nepal has a population of 29,136,808 million, but its GDP stands at 33.6 billion USD and its GDP per capita is 1,155.14 USD, all of which are significantly lower than the numbers in China or India.
In the first half of the twentieth century, Nepal’s economy was heavily dependent on agricultural production. The country experienced a range of technological, social and financial obstacles that hindered its economic growth, including poverty, low literacy rates and lack of infrastructure and technology to accommodate its rugged mountainous terrain. In the midst of an evolving technological world, Nepal remained stagnant, while many countries were experiencing the fruits of modernization.
To initiate economic growth and development, the National Development Council, an advisory body within the Nepali government, launched a series of “Five Year Plans” in 1956. The goal of this development planning was initially increasing economic growth but evolved to include enhancing contemporary sectors dealing with gender equality and equity, public health, the emergence of pandemics and adverse effects of climate change. Despite these ambitious goals, fulfilling these agendas has proven to be extremely difficult. Development planning requires a high level of organization, strong authority and proper strategy — factors that the Nepali government immensely lacks.
As of 2022, Nepal holds memberships in a number of prominent multilateral institutions geared towards economic and political developments. These include the South Asian Association for Regional Cooperation, Asian Development Bank, United Nations and World Trade Organization. It also has extensive trade agreements with 17 countries including the United States, United Kingdom and China.
However, despite successes in establishing alliances and partnership with economically powerful countries and institutions, the lack of economic productivity and domestic geopolitical issues have caused it to remain behind its allies. Nepal ranks the 17th poorest country in the world with 25% of the population under the poverty line and an unemployment rate of 42 %. As a result of the domestic inefficiency, desperate socio-economic conditions, hegemonic nations seeking influence and proximity to powerful countries, Nepal has become a major beneficiary of foreign aid, especially from China and the U.S.
China and Nepal’s alliance was institutionalized with the signing of the Sino-Nepal Treaty of Peace and Friendship on April 28, 1960. Since then, China has accorded a considerable amount of economic aid, especially in 2015 when the Gorkha earthquake claimed the lives of around 9,000 people, destroyed valuable historical sites and devastated infrastructure. Witnessing the adverse effects of the earthquake and Nepal’s struggle to rebuild and provide humanitarian assistance towards its citizens, China pledged $500 million USD to the Nepali government, committing itself to post-earthquake reconstruction and strengthening their bilateral relations.
The following year, Nepal and China signed the Transit and Transport Agreement, allowing Nepal to use Chinese ports to promote trade and end its sole reliance on Indian trading ports, which required a substantial amount of “procedural obstacles” with the Indian government.
Deepening their economic relationship, Nepali Foreign Secretary Shanker Das Bairagi and Chinese Ambassador Yu Hong signed the “Memorandum of Understanding on the framework agreement on China’s One Belt One Road Initiative” in May 2017, formally securing Nepal’s participation in one of China’s largest and most controversial infrastructure development projects and asserting China’s influence in the region’s affairs.
Nepal’s neutral and friendly approach to its foreign policy and alliances has also allowed it to maintain strong bilateral ties with the U.S., one of Nepal’s top benefactors and China’s biggest rival on the global stage. Having contributed more than $1.4 billion USD since 1951, the U.S. hopes to help Nepal by promoting democracy, economic development that favors investors and better disaster responses. Their primary goal is to secure Nepal from the insurgency of the Maoist party, which seeks to promote communist values and practices.
Similar to China, the U.S. has committed itself to Nepal’s development and security through substantial economic aid, providing an incentive for Nepal to sustain its relations with the U.S. In 2017, Nepal signed the Millennium Challenge Corporation with USAID, a $500 million USD compact to improve economic growth and reduce poverty through a multifaceted approach.
The bill aims to improve the supply of electricity, construct robust infrastructure and promote investments through regional trade. The MCC compact is ambitious and may be what Nepal’s economy needs to materialize significant progress, but it has struggled to gain widespread support and traction from Nepali government officials and the Chinese government.
The controversy surrounding the MCC has led to rampant debates within the Nepali political sphere about Nepal’s allegiance to China, causing a delay in the compact’s ratification by the Parliament by four years. In response to the delay, U.S. Assistant Secretary of State for South and Central Asian Affairs Donald Lu told Nepali politicians that the compact should be ratified by the end of February 2022, or the U.S. would have to “review its ties with Nepal.” The bill was officially ratified by the parliament on Feb. 27, 2022.
Nepal’s extensive need for assistance and its relative economic weakness is a focal point of interest for China and the U.S., both of whom hope to emerge as hegemonic nations, aspiring to have an edge in international governance and maintain as many spheres of regional influence as possible. Nepal’s Maoist party officials, who have affinity towards China rather than the U.S., argue that the latter is utilizing the MCC compact to assert its influence in Nepal as part of their Indo-Pacific strategy to adverse China’s authority by signaling an American-Nepalese military alliance. This would be disastrous for their relationship with China.
Maoist party leader Pushpa Kamal Dahal has continuously urged Prime Minister Sher Bahadur Deuba of the Nepal Congress Party to reject the MCC compact, but Deuba proposed to move forward with ratification. Unified Marxist-Leninist party member Bhim Rawal also claimed “the agreement will bring Nepal under the security umbrella of the United States and should be rejected,” a collective sentiment within his party. Additionally, the former prime minister of the Unified Socialist Party Madhav Kumar Nepal has voiced that he would reject the MCC if it hindered Sino-Nepalese relations.
Nepal’s former ambassador to Beijing Mahendra Bahadur Pandey claimed that “China has already sent the message that it will not sit idly if the development activities in Nepal undermine its interests here,” and that “China has been concerned about the MCC from the very beginning, and views it with suspicion.” Chinese foreign ministry spokeswoman Hua Chunying has also stated that the bill is a “Pandora’s box,” entailing that it may seem appealing outwardly but materializing it will cause adverse effects in Nepal’s geopolitics and future ties with China.
In contrast, Washington and the U.S. Embassy in Nepal have explicitly stated that the MCC is a “non-military agreement,” and as per the U.S. law, “MCC funding cannot be used for military assistance or training.” In response to the claims of MCC being part of the U.S. Indo-Pacific Strategy, the embassy also claims it “never has been a deliverable of the Indo-Pacific Strategy.” Washington has also claimed that China is purposely proliferating these conspiracy theories to interrupt the ratification process. It remains a grant gifted to Nepal for their own economic benefit.
Perhaps it is the nature of the grant being a gift rather than a loan that alarms Beijing and has led Chinese officials to question the U.S.’ move in the Asia theater. It could be driven by their desire to strengthen their bilateral relationship, gaining influence in the region to counter China’s hegemonic endeavors. By offering Nepal aid without strings attached geared towards development in the energy sector, the U.S. could strategically reduce Nepal’s heavy dependence on China, minimizing China’s influence in its southern neighbor.
Whatever the intent is, the ratification in February has already caused havoc within Nepal as party members continue to try to redirect Nepal’s future. The ratification vote was held amidst heated protests outside of the Nepali Parliament led by citizens affiliated with the Communist Party who strongly opposed the bill. Nepali police officers were forced to use “tear gas and water cannons to disperse the crowd,” leading to violent clashes. The Chinese government recognizes the ratification of the compact but Chinese foreign ministry spokesman Wang Wenbin warned Washington to “not interfere in other country’s internal affairs” or “undermine other sovereignty and interest out of selfish interests.”
The MCC has undoubtedly increased tensions between the two superpowers about the U.S.’ intent and presence in Nepal, contributing to further damage of Sino-U.S. relations. In this fight, Nepal is trapped as the buffer state, facing pressure from both sides to adhere to their strategic imperatives. Terminating the MCC compact would complicate Nepal’s relations with the U.S., but ratifying it could limit the strength of its relationship with China. It appears that either choice comes with a tradeoff that has the potential to change the course of Nepal’s foreign policy, economic development and bi-lateral partnerships.
In the Sino-American fight for influence in South Asia, Nepal could become collateral damage, hindering its own political sphere, increasing polarization between political parties and damaging external relations. During this volatile time when Nepal is struggling to emerge as a middle income country, domestic cooperation and unity is crucial. Geo-political disagreements and being caught amid the ideological battle of two hegemonic powers could lead to its downfall.
Foreign Affairs Feature is a collaboration project between The Daily Free Press and the International Relations Review
