MCC Compact: Nepal A FDI prospect

The MCC compact amount that will be conferred to Nepal is almost 95 per cent of the expected grant for the year, 3.5 per cent of Nepal’s annual budget and almost 14 per cent of the capital expenditure expected

Taking into consideration the principle and objectives evinced in the core of the Millennium Challenge Corporation (MCC), we find only nobility inherent there, but the fate of the country and the compact should also be of the same taste during and after the completion of the project. I don’t think that Nepal, an underdeveloped country in South Asia with almost 50 per cent of the population living on less than 3 dollars a day, is in a position to discard any bilateral aid with the overt intention of enhancing the socio-economic facet of the Nepalis.

MCC, with its mission to reduce global poverty through economic growth, spur private investment, increase regional connectivity and fight poverty, signed its first compact of 500 million dollars for South Asia with Nepal on September 14, 2017 to celebrate the 70th anniversary of Nepal-US relations, basically to tackle the issue of low energy supply and high transport costs.

In support of the US aid, Nepal will contribute an additional 130 million dollars - a lump sum of 630 million dollars - that will be spent in five years to improve the quality of 300 km of roads across a strategic road network. The programme has been previously launched successfully in Liberia, Guatemala and Cote d’Ivoire to upgrade roads, strengthen institutions for road maintenance, and reduce time and cost of travel. MCC has invested nearly 3 billion dollars worldwide in transport projects. Similarly, 300 km of high voltage power lines to add a second strategic cross-border transmission line to facilitate electricity trade with India and improve the reliability of Nepal’s electricity grid will be carried out.

Nepal has qualified for the MCC fund for its good governance, viz. political rights, civil liberties, control of corruption, government effectiveness, rule of law, freedom of information; investing in the people, viz. health expenditure, primary education, natural resource protection, immunisation rate, child health; and economic freedom, viz. fiscal policy, gender in economy, inflation, regulatory quality, and land right access to credit and business start-ups.

MCC has three major types of grants, namely, Threshold programme, Compact and Concurrent compact for regional investments. The Threshold programme induces a country to become eligible by advancing policy reforms and strengthening institutions to address the most binding limitations to economic growth. Second, Compacts are five-year agreements between MCC and an eligible country to fund specific programmes envisaged in the MCC unique model for development through recipient’s ownership and assuming a certain share of the financial contribution. Third, Concurrent compacts that promote cross-border economic integration, trade and collaboration allow MCC to work with other countries if there are projects that meet MCC’s investment criteria as well as evaluate the country’s ability to collaborate with MCC and a partner country. The AGOA and MCA Modernization Act (African Growth and Opportunity Act and Millennium Challenge Act Modernization Act) give MCC the authority to enter into a concurrent compact to promote economic integration with a third country. Till date, Benin, Burkina Faso, Ivory Coast, Ghana and Niger have reached into this agreement.

In the last 20 years, Nepal has received very feeble FDI, that is, 0.4 per cent of its GDP. Let us see the size of Nepal’s budget of 2076- 77. The total budget is of Rs 1,532 billion, capital expenditure of Rs 408 billion, while foreign grants are expected to be Rs 58 billion. The MCC compact amount that will be conferred to Nepal is almost 95 per cent of the expected grant for the year, 3.5 per cent of Nepal’s annual budget and almost 14 per cent of the capital expenditure expected, much higher if compared with the incurred capital expenditure. This is really a huge volume of aid coming out from a bilateral partner. Nepal is for sure going to lose if this aid doesn’t find parliamentary ratification.

At present, there is no reason to discard the programme. For me, the controversy on ratification of the programme should not be about what the past of the programme was or what the present seems, but what the fate of the programme will be. Parliamentary ratification of the compact, with frictional voices maintaining that MCC is a part of Washington’s Indo-Pacific Strategy (IPS) or the US ambassador’s clarification that MCC compact is not a part of the IPS or that the MCC was born before IPS came into existence, is not our concern and should not be. Our concern and parliamentary endorsement should incorporate and ensure that there is no military but only economic component.

Should the compact programme, directly or indirectly, aim to fetch strategic information about any third country and provide covert aid to put a third country in a trap, the programme is doubtful. The programme in such case shall be deemed void, and a clause needs to be inserted in Article 5 of the pact. We need to strategically ratify it so as to weaken the hidden detrimental intent, if there is any, so that a third country at any moment finds it at no risk.

This may sometimes need an independent appraisal at the international level to nullify the faulty intention. Else, the aid and compact are a high-return cash cow for Nepal.

Gautam is an Assistant Director at Nepal Rastra Bank