MCC

Nepal has experienced political turmoil, a dire economic situation, and monumental foreign policy developments in 2022. The country hosted several high-level officials from India, China, and the United States this past year, navigating a more polarized geopolitical climate in South Asia. Greater attention from the international community empowered Kathmandu to accept the $500 million grant from the Millennium Challenge Corporation (MCC) aimed at improving energy transmission and road connectivity. Nevertheless, a misinformed public protested the government’s decision, believing that the compact would supersede Nepal’s constitution and allow U.S. soldiers to enter Nepal. At the same time, the government imposed an import embargo to manage the growing trade imbalance as its currency nosedived. On the political front, several newcomers emerged victorious in local, federal, and provincial elections across the country this year.

The near future presents additional challenges for Nepal. Since the previous governments repeatedly prioritized local interests over national ones, it is anticipated that the government’s position on foreign and economic policy will become weaker and more fractured as Pushpa Kamal Dahal takes charge as Prime Minister under the Communist Party of Nepal-Unified Marxist Leninist (CPN-UML) and the Maoist Center coalition.

The MCC and Nepal’s Foreign Policy Balancing

Protesters, empowered by misinformation and a lack of communication from officials, took to the streets to protest the MCC. An outnumbered police force resorted to physical restraint to prevent protesters seeking to disrupt the signing of the compact from pushing their way into the parliament building. YouTube videos rife with misinformation proliferated, portraying the compact as a U.S. scheme to entrap Nepal and its foreign policy decisions. In reality, the MCC agreement was a U.S. grant designed to bridge the energy supply gap and enhance road infrastructure in Nepal.

As Nepal grows in political importance for India, China, and the United States, it must meticulously calibrate its policies to avoid antagonizing any country while simultaneously carrying out its foreign policy according to its own values and national interests.

The MCC also drew reactions from Nepal’s neighbors, as evidenced by Chinese diplomats lobbying against the MCC in Kathmandu. For instance, Chinese Ambassador to Nepal Hou Yanqi and Chinese Vice Minister Chen Zhou met with Nepal’s top leaders to dissuade them from signing the MCC compact. China believed the grant would threaten its ambitious Belt and Road Initiative (BRI), which envisaged a slew of infrastructure projects connecting China with its neighbors, including Nepal. For example, the BRI envisions the construction of a 400KV transmission line and the construction of cross-border roads, which are also the main elements of the MCC. The MCC’s infrastructure goals directly rivaled Beijing’s BRI objectives in Nepal, with the MCC finalized just four months after Nepal signed on to China’s BRI.

The grant has tested Nepal’s foreign policy. As the country grows in political importance for India, China, and the United States, it must meticulously calibrate its policies to avoid antagonizing any country while simultaneously carrying out its foreign policy according to its own values and national interests.

The Economy

Nepal’s economy is intrinsically linked with its foreign policy. Nepal remains among the poorest and slowest-growing economies in Asia, exacerbating its foreign policy vulnerabilities. Owing to its weak economy, Nepal often depends on its neighbors and third parties for loans and grants to advance its economic interests. For example, the Public Debt Management Office estimated that Nepal’s overall debt could account for 41.47 percent of its GDP in the past year. This cycle has created a situation of dependency where Nepal has less bargaining power. Such positioning makes Nepal susceptible to influence by larger economies.

Nepal’s economic situation has declined this past year. Foreign exchange reserves decreased from $11.75 billion in mid-July 2021 to $9.45 billion in mid-June 2022. As a result, the government issued a complete ban on importing certain goods, like readymade liquor, mobile sets worth more than $600, diamonds, and tobacco products. The ban limited entrepreneurs in conducting wholesale and retail business, while Nepali consumers were left with limited options. Furthermore, Nepal’s burgeoning trade deficit with India has been an enduring problem for its economy. Nepal received about $594 million worth of goods from India while only exporting $81 million to India, leaving Nepal with a $513 million trade deficit with its northern neighbor.

Remittances from overseas Nepali workers – coupled with earnings from Nepal’s tourism industry – have helped to significantly reduce the country’s trade imbalance. Two years of pandemic-related travel restrictions substantially decreased the amount remitted, but Nepal’s remittance flows showed signs of improvement this year. From July to October, remittances to Nepal increased by about 17 percent. Likewise, the United Nations World Tourism Organization (UNWTO) predicted that Nepal would experience a 60 percent increase in international tourist visits in 2023.

While remittances are slowly increasing as the world recovers from the COVID-19 pandemic, global restrictions exposed the vulnerabilities of relying on such a system for income. Moreover, Nepal’s trade imbalance could affect its ability to conduct independent foreign policy decisions.

Elections 2022

Nepal’s 2022 elections ushered in several changes as 43 new faces enter parliament this year. In the new federal parliament, the opposition UML and Nepali Congress (NC) are likely to continue their dominance, but candidates from emerging political groups and independents are likely to upset that equilibrium. Similarly, 385 independent candidates rose to political office in Nepal’s local elections. For instance, Balen Shah, a young independent candidate, disrupted the status quo by winning the mayoral race in Kathmandu. Likewise, another independent and former migrant worker, Harka Sampahang was victorious in Dharan.

Newer parties and independent candidates have produced more progressive agendas: emphasizing job development, anti-corruption, expanded access to healthcare and education, women’s rights, tourism, and climate change. Their results have shown that capitalizing on dissatisfaction with existing parties resonated with Nepali voters. Moreover, the popularity of the #NoNotAgain online campaign in July captured the disenchantment of Nepal’s younger population. The new Facebook page featured a poster with six of Nepal’s most prominent politicians, including Prime Minister Sher Bahadur Deuba and former Prime Minister KP Oli. Since then, the hashtag “NoNotAgain” has become an outlet for Nepalis to reject senior officials in federal and provincial legislative elections.

The emergence of the pro-monarchist Rastriya Prajatantra Party (RPP) and the National Independent Party (NIP) in 2022 upset the political balance for Nepal’s more senior leaders even further. The rise of the populist NIP and the RPP parties elucidates the ongoing crisis among parties and their representation. However, an excessive focus on forging negative narratives against senior leaders without introducing practical policies for eradicating corruption is unlikely to create long-term changes from these parties in 2023.

Conclusion

Foreign policy tensions, a declining economy, and a lively election season made 2022 an eventful year for Nepal. The MCC controversy prompted Nepal to reevaluate its relevance on the international stage amid the larger strategic fight between China and the United States. In addition, Kathmandu’s distressed economy indicates that Nepal must prioritize resolving its economic woes. Given the interconnectivity of its foreign policy and economy, Nepal needs to reduce its economic dependency on other countries to fully advance a foreign policy that best serves its interests.

Nepal’s turbulent 2022 will only spill over into the next year if the coalition government does not prioritize an independent foreign policy, economic recovery, and the demands of its younger electorate.

The election results demonstrated that anti-establishment feelings ran high with voters. A politically charged younger demographic likely contributed to this political upset. In this election cycle, 49 percent of the voters were between the ages of 26-40. A young demographic dividend showed their frustration over tried and tested leaders who failed to live up to their expectations. Young voters are demanding rapid service delivery, effective governance, employment prospects, and business-friendly environments. Neglecting these demands will likely drive more Nepalis to emigrate to other nations in search of better living conditions.

The absence of a majority in Parliament means that the government will once more consist of a coalition. An unstable coalition government signals inconsistency in Kathmandu’s foreign policy outlook. Nepal’s foreign policy, economic, and political situations are linked. Nepal’s turbulent 2022 will only spill over into the next year if the coalition government does not prioritize an independent foreign policy, economic recovery, and the demands of its younger electorate.

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Image 1: Prakash Mathema/AFP via Getty Images

Image 2: Sunil Pradhan/Anadolu Agency via Getty Images

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