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International relations

Nepal ruling party split over US aid threat to China relations

US Indo-Pacific Strategy grinds against China's Belt and Road Initiative

A major U.S. grant agreed in 2017 for Nepali infrastructure has become a political football because of concerns about its possible effect on relations with China.  (Nikkei Montage/Source photo by AP)

KATHMANDU -- There are widening divisions in the leadership of Nepal's ruling party over a U.S. promise of aid that rivals of Prime Minister K.P. Sharma Oli worry will damage the country's blossoming relations with China. 

A Millennium Challenge Corporation (MCC) grant agreed in 2017 has widened splits in the Nepal Communist Party. Oli has been pushing for its parliamentary approval, but influential party members are opposed. They argue that the aid is part of the U.S. Indo-Pacific Strategy to limit China's influence in the region.

Oli has failed to get the agreement ratified twice since a related piece of legislation was put before parliament in July 2019.

"We may have differences over the agreement, but it should not hurt our friendly relations and the environment for international aid," Yuba Raj Khatiwada, the finance minister and government spokesman, told parliament on June 9 after the budget session got underway in May. 

Nepal has other thorns in its international relations. In May, it issued a map highlighting a northwestern border area that it is disputing with India, and this may have made Oli reluctant to test relations with the U.S.

Early this year, a three-member panel headed by Jhalanath Khanal, a former prime minister, submitted a report to Oli calling for amendments to the agreement Nepal and the U.S. signed three years ago. 

The U.S. committed to $500 million against a $130 million contribution from Nepal for a 400 kilovolt power transmission line and the upgrade of 300km of roads in the Himalayan country's southeast. The line would facilitate power distribution after a number of hydro projects reach completion.

Prime Minister KP Sharma Oli farewells President Xi Jinping at the end of his visit to Kathmandu in October.    © Reuters

Critics eager to burnish their nationalist credentials have said accepting the MCC grant would undermine Nepal's sovereignty by drawing the country more into the U.S. orbit, and rankle China.

The disagreement is a manifestation of serious rifts inside the party. "Those who have been marginalized by the Oli government have come together against the agreement," Sridhar Khatri, the former executive director of South Asia Centre for Policy Studies in Kathmandu, told the Nikkei Asian Review. 

Regional observers say the controversy reflects China's growing clout through its Belt and Road Initiative and diminishing U.S. influence in Nepal.

Geja Sharma Wagle, a political commentator based in Kathmandu, sees the ruling party's close ties with the Chinese Communist Party as a key factor. A training programme on President Xi Jinping's thinking was held in Kathmandu ahead of the Chinese leader's visit last year. To cement relations, Xi pledged $500 million in aid to Nepal, exactly counterbalancing the U.S. grant.

"Both the government and the party have close ties with China," Wagle told Nikkei. Oli's government adopted a China-friendly foreign policy, a change from previous governments that focused on the West and India. "Those governments tried to strike a balance among the powerful nations," he said. "But the current government has distanced itself from them. As a result, China has prevailed in Nepal."

Mixed messaging by U.S. officials has not helped their cause. In December 2018, the Department of State issued a statement that Nepal played a "central role in a free, open and prosperous Indo-Pacific."

According to local media, David J. Ranz, acting assistant secretary for South Asia, told reporters in Kathmandu last year that MCC was "one of the most important initiatives being implemented in Nepal under the U.S. Indo-Pacific Strategy."

Nepal signed on to the Belt and Road Initiative in 2017. Khatri, a retired professor of political science at Tribhuvan University in Kathmandu, is concerned by the risk of depending on a single major power.

"The core of Nepal's foreign policy is diversifying its relations with all major powers," Khatri told Nikkei. "It is trying to put all its eggs into one basket. If we focus on only one country, it will be at our cost."

After signing up to China's Belt and Road Initiative in 2017, Nepal has distanced itself from India and the West.    © Reuters

The debate over the grant has played out across Nepal's vibrant media platforms. With growing hostility on the streets, U.S. largesse is in jeopardy after 70 years of bilateral relations.   

"This is not a loan, but a grant," said Wagle. "Given the economic fallout from the pandemic, Nepal will soon struggle to secure loans. The project is significant for Nepal's infrastructure development. If we don't implement it, it will discourage other Western countries from helping Nepal."

Nepal's economy is already stressed. Remittances and tourist dollars have dried up because of the COVID-19 pandemic. "We will soon face an economic crunch," said Khatri, noting that the U.S. is cutting its expenditures. "How will we raise funds to build the infrastructure if this grant gets canceled? Foreign policy should not be conducted on the basis of emotion."

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