Deuba government faces challenge over American deadline on compact

Deuba government faces challenge over American deadline on compact

Differences between PM, Prachanda over U.S. grant imperil ruling coalition. Projects include cross-border electricity trade with India

Nepal Prime Minister Sher Bahadur Deuba’s government is facing a major challenge this month as the Biden administration has set a deadline for the ratification of the US Millenium Challenge Corporation (MCC) development compact by February 28, which members of the ruling coalition are divided on.

The rift over the MCC agreement and development grant of more than $500 million, which has divided Mr. Deuba’s National Congress party (NC) and his coalition partner Pushpa Kamal Dahal’s (Prachanda) Communist party (Maoist), is being watched closely by South Block as it could not only affect the stability of the government but also play a decisive role in local elections set for May 13 and general elections later this year.

The U.S. deadline was set in a letter sent to Mr. Deuba and Mr. Prachanda on February 3 by the MCC Acting CEO in Washington, made available to the media, and followed up with a stern telephone call by Assistant Secretary of State for South and Central Asia Donald Lu on February 10 to PM Deuba, Mr. Prachanda and Opposition leader of the Communist Party (UML) K.P. Sharma Oli. In the call, sources said, Mr. Lu warned that the relations would be “affected” if the compact — originally signed in 2017 — is not ratified in the Nepal Parliament by month end.

“Absent ratification, it is within the MCC Board’s authority to discontinue Nepal’s eligibility to receive the $500 million compact grant from the United States,” the February 3 letter signed by MCC Acting CEO Mahmoud Bah had also said, adding in no uncertain terms that “Such a decision would end MCC’s partnership with Nepal.” The letter was written in response to a joint letter by PM Deuba and Mr. Prachanda in September 2021, asking for 4-5 months more to complete the ratification.

Speaking to The Hindu from Kathmandu, head of the International Relations wing of Mr. Oli’s party, Rajan Bhattarai confirmed that Mr. Lu had spoken to Mr. Oli, PM Deuba and Mr. Prachanda making the ultimatum clear.

In 2017, Mr. Deuba joined a group of 46 countries that had signed the MCC compact, inviting the American development agency to work on a number of projects including on “road quality, availability and reliability of electricity, and to facilitate cross-border electricity trade between Nepal and India”.

The compact was also seen as an American counter-move against China’s Belt and Road Initiative that then PM Oli’s government had signed in 2016. Since then, wrangles over the ratification of the MCC have roiled Nepali domestic politics and given the appearance that Nepal is caught in the crossfire between Washington and Beijing.

A similar disagreement between Mr. Oli and Mr. Prachanda in 2020 had led to divisions that eventually saw Mr. Oli’s coalition collapse last year. In the current Parliament, where neither the Congress that is in favour of the MCC nor the Communist parties led by Mr. Prachanda and Madhav Nepal who want it delayed have the strength to win a vote on ratifying the compact, Mr. Oli’s party could hold the deciding vote.

 When asked, MEA officials declined to comment on the issue.

While the issue does not directly concern India, South Block has been watching the situation developing with keen interest in the outcome, sources said. In addition, the fact that Donald Lu had called the Nepali leaders from Australia, where he was present for the Quad ministerial meeting, has led to speculation that the MCC development projects, especially the plan for cross-border electricity trade, could also become an initiative for the Quad, that has held discussions on joint infrastructure partnership opportunities in India’s near neighbourhood, including Sri Lanka, Nepal and the Maldives.

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