Why the United States Is Courting Nepal

Welcome to Foreign Policy’s South Asia Brief.

The highlights this week: A top U.S. diplomat makes a stop in Nepal, the United States and India launch a new technology cooperation initiative, and Pakistan struggles with terrorism and an economic crisis.

If you would like to receive South Asia Brief in your inbox every Thursday, please sign up here.

Victoria Nuland, the U.S. undersecretary of state for political affairs, is visiting Nepal, India, and Sri Lanka this week. New Delhi is a U.S. strategic partner, and Washington is working to assist Colombo with its ailing economy. But Kathmandu has also quietly become a target of high-level U.S. engagement, thanks to U.S.-China competition. Nuland is the most senior foreign official to travel to Nepal since Prime Minister Pushpa Kamal Dahal took office in December.

Nuland’s visit follows one last July by Donald Lu, the top South Asia official at the U.S. State Department, and U.S. Secretary of State Antony Blinken spoke with then-Prime Minister Sher Bahadur Deuba last March. Samantha Power, the head of the U.S. Agency for International Development, will also visit this month, followed by another senior U.S. official, Afreen Akhter.

China’s growing influence in Nepal has in great part fueled this rapid-fire diplomacy. Beijing has increased investment and provided COVID-19 vaccines in the country. But some of its other interventions are overtly political: It has reportedly sought to unite Nepal’s rival communist parties, which are ideologically aligned with China. These efforts appear to have paid off: After elections last November, the country’s two main communist parties formed a ruling coalition.

The United States has long viewed closer partnership with Nepal as part of its Indo-Pacific strategy intended to counterbalance China. Last year, Nepal’s parliament ratified a $500 million Millennium Challenge Corporation (MCC) infrastructure grant after a five-year delay. For Washington, the package serves as pushback to Beijing’s infrastructure investments. Nonaligned Nepal initially resisted the grant in part out of fear that it would antagonize China. However, soon after Lu threatened to review future relations with Nepal, it was approved.

Unsurprisingly, keeping the MCC grant on track for formal implementation in August was a top discussion point while Nuland was in Kathmandu this week. But U.S.-China competition loomed over her visit in other ways. She publicly lauded Nepal’s democratic successes since ending a decade-long civil war in 2006, contrasting this political evolution with unnamed autocracies. “We see autocrats trying to change the global rules of the road by force,” Nuland said—in a clear reference to Beijing. “That is not the Nepali way, and that is not the American way.”

Nuland also announced that the United States would invest more than $1 billion in clean energy, electrification, and small businesses in Nepal over the next five years. These plans telegraph the U.S. intention to match China’s work in Nepal in terms of energy infrastructure investment as well as to fund projects in areas that Beijing has ignored. Nuland added that she supports Nepal’s “good relations with all of its neighbors,” a nod to the new government’s foreign policy emphasizing ties with both China and India, which also compete for influence in the country.

Dahal has a long association with leftist politics—he was once a Maoist rebel leader—and has formed a new alliance with a party led by former Prime Minister K.P. Sharma Oli, who strengthened ties with China while in office. But Dahal’s party remains committed to ties with both of its powerful neighbors, which makes sense given Nepal’s history of nonalignment. It is also struggling economically, with inflation at its highest level in six years, and stands to benefit by courting financial assistance from both Beijing and New Delhi.

Still, managing geopolitical competition won’t be easy. Nepal’s implementation of the MCC grant will certainly spur China to pursue more investment, especially as recent projects have faced obstacles. That could prompt India to follow suit, with the United States—perhaps through financing from the International Development Finance Corporation—making additional pitches.

All of this would benefit Nepal’s immediate economic needs but perhaps not its long-term strategic interests. Like other nonaligned states in South Asia, Nepal seeks strategic space to pursue relations with China, India, and the United States on its own terms. That’s harder to do as countries fall over one another to court Kathmandu.

U.S., India discuss tech cooperation. Nuland’s visit to New Delhi coincided with high-level U.S.-India engagement in Washington. On Tuesday, Indian National Security Advisor Ajit Doval joined his U.S. counterpart, Jake Sullivan, to launch the Initiative on Critical and Emerging Technologies. The project aims for better cooperation in producing materials for defense, telecommunications, and computing—especially semiconductor chips; one key goal is to address regulatory practices that have inhibited technology transfers.

This cooperation highlights how the U.S.-India relationship continues to evolve as the countries expand cooperation in multiple spaces. That said, competition with China was a significant motivator for the new initiative. The United States and India both worry about the surveillance risks of Chinese technologies as well as their use toward undemocratic ends. (The irony is that New Delhi’s own technology policies can be undemocratic, including pressing U.S. tech firms to remove content critical of the government.)

It’s also likely that Russia is a factor in the discussions. The United States, in its efforts to convince India to wean itself off Russian military equipment in the long term, likely wants to help New Delhi produce defense technologies that it has historically acquired from Moscow.

Crises compound in Pakistan. This week began tragically for Pakistan: On Monday, a terrorist attack on a mosque in Peshawar killed 101 people, many of them police officers. The attack, a suicide bombing, was the deadliest in Pakistan since 2018—and a wake-up call for the government about the growing threat of terrorism since the Taliban takeover in neighboring Afghanistan in 2021. The bombing was also a fresh shock to a country already on edge because of a severe economic crisis.

Pakistan is now on the brink of default. To avoid that outcome, it must secure new funding from the International Monetary Fund (IMF). An IMF delegation met with Pakistani officials this week; Islamabad seeks an agreement to release around $1 billion to help replenish rapidly dwindling foreign reserves. In recent days, Pakistan has imposed new austerity measures to meet IMF conditions, including an oil price hike. But one of the remaining holdups to an agreement is the government’s insistence on keeping some fuel subsidies in place.

With Pakistan now changing course, the IMF may come around soon, but the question is whether it will be too late. Pakistan’s reserves have been falling for nearly a year. It currently has only enough to pay for a few weeks’ worth of imports. And on Thursday, reports emerged that the IMF delegation rejected Pakistan’s policy proposals, suggesting a deal isn’t imminent.

India’s new budget. On Wednesday, Indian Finance Minister Nirmala Sitharaman announced India’s 2023 budget. Although it’s not official until it passes Parliament, the ruling party’s large majority means it shouldn’t face any obstacles. But this year’s budget carries particular importance given India’s national elections next year. The $550 billion package emphasizes job creation; despite robust growth in recent years, India still struggles with unemployment, which has periodically sparked angry public protests.

The budget also focuses on so-called green growth—investments meant to ramp up India’s renewable energy sector. It includes new spending for clean energy production, storage facilities for renewables, and mangrove restoration to reduce carbon emissions. This focus aims to create jobs, but it also signals India’s commitment to following through on its ambitious emissions reduction pledges, especially as New Delhi leads the G-20 this year.

This week, the IMF formally approved a stabilization package for Bangladesh valued at $4.7 billion. The package is the first given to an Asian country that includes funding from the IMF’s new Resilience and Sustainability Facility, intended to help vulnerable middle-income countries. Bangladesh’s package comes as its neighbors Pakistan and Sri Lanka—under worse economic stress—have struggled to secure new assistance.

The IMF likely has fewer concerns about Dhaka’s economic policies. Announcing the new agreement, IMF Deputy Managing Director Antoinette M. Sayeh praised Bangladesh’s economic growth and said the “COVID-19 pandemic and … Russia’s war in Ukraine interrupted this long period of robust economic performance”—implying that external shocks and not poor policies had provoked the conditions that prompted Dhaka to go to the IMF.

Importantly, Bangladesh requested a stabilization package, not a bailout package, as Pakistan and Sri Lanka have. IMF officials likely saw this as an effort to preempt worsening economic problems down the road. Islamabad and Colombo came to the IMF in bad shape—and that’s because bad policies produced rapidly deteriorating economic conditions, along with political instability. None of this applied in the case of Bangladesh, even with recent protests in response to rising economic stress.

• Europe Doesn’t Need the United States Anymore by Rajan Menon and Daniel R. DePetris

• Why Saudi Arabia Doesn’t Want Iran’s Regime to Fail by Talal Mohammad

• South Korea Could Sweep Up Europe’s Tank Market by Blake Herzinger

In Sri Lanka’s Daily Mirror, writer Yasmin Koch laments that 75 years after independence, the country has not fully taken advantage of its liberation from British rule, citing Colombo’s divisive politics. “Today’s politics do not put country and people first. It’s a case of back-stabbing, jealousy, blame-game, and so the list goes on. Sadly, Sri Lanka is a country of missed opportunities,” she writes.

An editorial in Dawn argues that recent deadly bus and boat accidents highlight Pakistan’s lack of urgency when it comes to badly needed safety reforms. “Unless our attitude towards safety changes, and there are actual lessons learned following official probes into such tragedies, we will be doomed to repeatedly witness such disasters,” it reads.

In the Print, author Sudarshan Ramabadran analyzes the significance of Indian External Affairs Minister S. Jaishankar’s recent reference to the Hindu god Hanuman as one of the greatest diplomats. New Delhi “is bringing back the importance of a ‘civilisational nation State’ to the country’s foreign policy discourse. Such a move augments the role of culture in international relations and instrumentalises it for national aims,” Ramabadran writes.