After repeated delays, a controversial US aid grant to provide US$500 million in vitally needed infrastructure funds to Nepal has been introduced in the country’s parliament for approval. Washington has imposed an end of February deadline for lawmakers in Kathmandu to ratify the Millennium Challenge Corporation (MCC) pact. But the quickly approaching deadline is not the only thing that could scupper the agreement, as the US-China rivalry and domestic disagreement are threatening to sink the deal signed in 2017. “The current political calculus is not very conducive,” said Santosh Sharma Poudel, co-founder of the Nepal Institute for Policy Research. Fresh protests erupted Sunday in the capital of Kathmandu after the grant was tabled with police firing tear gas to disperse demonstrators who called the pact a sell-out of national sovereignty. Their views echo that of Maoist politicians in Nepal who have traditionally been pro-Beijing. The discord over the grant has polarised politics in the impoverished state squeezed between India and China , and threatens the survival of the coalition led by Prime Minister Sher Bahadur Deuba of the centrist National Congress. It has also sparked a US-Sino war-of-words. Beijing will “definitely be wary of increasing American influence in its soft belly,” said Poudel. The US, Nepal’s biggest bilateral donor, has warned if Kathmandu rejects the grant, it will “review relations” with the aid-dependent nation. A State Department spokesperson also said on February 14 that Nepal could “lose bilateral and multilateral aid as well as foreign direct investment.” Furthermore, the spokeperson accused China of spearheading a “sophisticated disinformation campaign”. In response, Chinese Foreign Ministry spokesperson Wang Wenbin said on February 18 in a report carried by the state-run Global Times daily that Beijing opposes any form of “coercive diplomacy” and painted the MCC grant as “nothing more than a pact with the geopolitical purpose of targeting China.” Nepal’s political parties are at loggerheads over accepting the grant. But at different times, all three of the country’s largest parties had backed the donation from the MCC, a foreign aid agency set up by US President George Bush in 2004 to help combat terrorism post-9/11 . Deuba, who is regarded as pro-West, has said the grant is key for development and “nothing in it that goes against the national interest.” Of the US$500 million, US$400 million is earmarked for transmission lines – Nepal has vast hydropower resources but lacks the infrastructure to fully exploit them. The lines would allow crucial load-sharing with India and meet expanding electricity demand in the nation of 30 million people that is plagued by blackouts. The remainder would go on roads and administrative costs. Nepal is contributing an additional US$130 million, some of which has already been spent on pre-project work in anticipation of the grant being approved. Business leaders are also squarely behind the grant, saying it would improve growth and job creation in Nepal, economically hammered by the pandemic. The [MCC] issue has become so toxic many ‘nationalists’ use it as a loyalty test Santosh Sharma Poudel, co-founder of the Nepal Institute for Policy Research The [MCC] issue has become so toxic many ‘nationalists’ use it as a loyalty test But the Communist Party of Nepal (Maoist) in Deuba’s five-party coalition tilts towards China and opposes ratification without changes. Maoist leader Pushpa Kamal Dahal, best known by his rebel civil war name Prachanda, says the grant would give the “imperialist” US more leverage, threaten Nepal’s non-aligned status and potentially put it in the crosshairs of a clash with China. The issue “has become so toxic many ‘nationalists’ use it as a loyalty test,” said Poudel. Prachanda’s hand has been weakened, though, by the leak this month of a joint letter he and Deuba wrote to the US government last September supporting the grant and seeking an extension to the end of February for its ratification. It was Prachanda’s Maoist government in 2014 that applied for the grant and all administrations since have backed the aid programme that was agreed with the US in 2017. (Nepal, fractured by political, ethnic, caste and other differences, is known for its revolving-door governments). The pact’s ratification was repeatedly postponed during 2020 and 2021 as the debate over the deal grew more rancorous. The MCC which has partnered with nearly 30 countries on US$13 billion worth of aid projects, signed the pact with Nepal just months before Kathmandu joined China’s Belt and Road Initiative (BRI) to boost global trade and connectivity. The US insists the grant involves “no strings” and has no other strategic or component. But opponents have jumped on some comments by US government officials linking the money to Washington’s Indo-Pacific strategy that commits American diplomatic and security resources to the region to repel Chinese efforts to expand its political and economic influence. The US has since said the government officials misspoke – declaring that the grant focuses solely on development needs, and is not politically-motivated. But the communist parties have been pushing the narrative on social media that the grant will allow the US to include Nepal under its strategy, according to political watchers. There are even videos warning of the US invading Nepal. “In all these parties, China has a very strong network and China utilised that network against the MCC,” said Mrigendra Bahadur Karki, head of the Centre for Nepal and Asian Studies at Nepal’s Tribhuvan University The row comes as local and national elections are due to be held this year and analysts say it is politically advantageous for politicians to portray themselves as nationalists defending the country’s interests. Nepal president dissolves parliament, sets elections for spring According to the national daily Kathmandu Post , former prime minister KP Sharma Oli, leader of the moderate main opposition Communist Party of Nepal, has offered to throw his party’s support behind the deal – ensuring its passage – if Deuba splits with his coalition partners. Oli was an enthusiastic supporter of the deal when in power, but has been non-committal while in opposition. Deuba, though , is not keen on breaking up his coalition. Even if the grant fails to win approval by the deadline, some analysts believe the US will wait till the elections are over for an answer out of keenness not to suffer another rebuff in the region. This is after Sri Lanka – also part of the Belt and Road Initiative – last year rejected a US480 million MCC grant, asserting the MCC was part of a US plan to use the Indian Ocean Island for strategic purposes and could put Sri Lanka at the centre of a US-China confrontation. China, whose pockets are far deeper than rival India’s, has been growing its influence in Sri Lanka and the Maldives by constructing mega-infrastructure projects, extending its sway in a region that was traditionally India’s strategic backyard. India has faced increasing hostility from some Nepalis who object to what they see as New Delhi’s “high-handedness” and meddling. Chinese President Xi Jinping visited Nepal in 2019 and pledged to boost rail, road and aviation connectivity under the giant Belt and Road Initiative, but no work has begun on any project. “The US has time and again stated that it cannot ‘wait forever’, but has waited for the past five years. Also, given that the US had to withdraw from Sri Lanka, if it withdraws from Nepal too, it would be a severe blow to its position and influence in South Asia,” said Poudel. “Therefore, the US is keen to see it through in Nepal. Hence, the unusual level of engagement and pressure (even threat) was put by various US officials on Nepali leaders,” he said. Others analysts note, however, that the US Congress makes periodic assessments of how well the MCC is doing its job and that the organisation cannot afford to continue to sit on US$500 million and would come under pressure to disburse the money to other recipients. Some Nepalese analysts argue whether it is the MCC or BRI, it is in Nepal’s interests to weigh any development proposal on “their merits, not on geopolitical speculations,” noted Naresh Kumar, a research fellow at the Indian Council of World Affairs. These analysts say “engaging with some but not others go against Nepal’s guiding foreign policy principle of ‘amity with all and enmity with none’,” he said.