KATHMANDU: For over seven decades, the United States and Nepal have maintained a partnership anchored in shared values and mutual benefit, with the U.S. playing a key role in Nepal’s development. From eradicating malaria in the 1950s to offering post-earthquake relief in 2015 and providing 1.5 million COVID-19 vaccines, American assistance has been crucial in Nepal’s moments of need. The Millennium Challenge Corporation (MCC) was seen as the latest step in this enduring collaboration. Yet, as the U.S. scales back its major grants and development support, Nepal is now confronted with the unsettling prospect that its once-dependable ally may no longer be a reliable partner in its future growth.
The Department of Government Efficiency (DOGE) is working to shutter the Millennium Challenge Corporation (MCC), sending shockwaves through Nepal and reverberating far beyond its borders. This looming closure is not merely a blow to the country’s infrastructure projects—it threatens to undermine the United States’ reputation as a dependable development partner. The ripple effects of the MCC’s collapse are already being felt across political and financial spheres, as Nepal faces the daunting prospect of moving forward without the critical funding that had long been seen as a cornerstone of its infrastructure ambitions.
The abrupt shift in Nepal’s relations with the United States took a dramatic turn on February 18, 2025, when the Ministry of Finance confirmed that the Millennium Challenge Corporation (MCC) had suspended payments for projects funded under the Nepal Compact. The move, precipitated by a 90-day freeze imposed by an executive order from U.S. President Donald Trump on January 20, 2025, left Nepal reeling, facing the possibility that the MCC’s $500 million development aid might be permanently pulled.
MCC’s Departure
For two decades, the Millennium Challenge Corporation (MCC) has been a symbol of America’s commitment to supporting global development. Its infrastructure-focused compacts, designed to stimulate economic growth in partner nations, have been vital for countries like Nepal. But now, with the MCC’s impending closure, Nepal finds itself at a critical juncture. As one of the program’s most ambitious recipients, the country must reckon with unfinished projects, financial shortfalls, and the broader implications of this sudden shift.
The political ramifications of the MCC’s potential closure are far-reaching. In Nepal, the loss of such a significant development partner would be seen as a major blow to the country’s international standing. For the U.S., a retreat from its commitment to Nepal would signal a waning influence in South Asia, undermining its soft power in a region where China has been expanding its footprint.
For Nepal, the suspension is not merely a matter of economic loss. It is a stark reminder of how foreign aid, once seen as a symbol of progress and partnership, can be withdrawn with little warning. In a country where infrastructure development has long been stymied by budgetary constraints, the cancellation of the MCC program represents a lost opportunity to address critical energy shortages and enhance regional connectivity. Nepal’s energy sector, in particular, is already struggling with chronic power cuts and insufficient capacity to meet domestic demand. The transmission line funded by the MCC was seen as a lifeline, one that would integrate Nepal’s power grid with those of its neighbors, creating a more reliable and resilient energy system.
The MCC, which was signed in September 2017 and ratified by Nepal’s parliament in February 2022, had become a cornerstone of the country’s development strategy. The compact promised critical infrastructure improvements, including a high-voltage 315-kilometer transmission line and significant road upgrades across the East-West Highway. The aid, with a matching commitment of $197 million from Nepal’s government, had been a rare opportunity for economic transformation. Yet, with the freeze on payments, this prospect now seems increasingly distant.
A Divisive Agreement
The roots of the MCC’s suspension lie not just in the Trump administration’s policies but also in Nepal’s domestic political turmoil. The agreement, while hailed as a strategic partnership between the U.S. and Nepal, quickly became a flashpoint for political divisions in Nepal. Despite initial optimism, the compact has been deeply divisive, with the ruling coalition government, consisting of the Nepali Congress and the CPN-UML, has been unable to present a united front on the matter.
In February 2022, as Finance Minister Gyanendra Bahadur Karki tabled the MCC agreement in parliament, the political opposition erupted in protest. The CPN-UML, Nepal’s largest opposition party at that time, launched a fierce campaign against the compact, questioning its terms and accusing the government of overstepping constitutional bounds. The protests intensified, with demonstrators clashing in the streets of Kathmandu and lawmakers obstructing parliament proceedings. The then Prime Minister Sher Bahadur Deuba’s government was forced to navigate these tumultuous waters, ultimately passing the agreement in parliament through a fragile coalition with the CPN-UML’s support.
But the political fallout from the compact’s passage was far from over. The deal remains a polarizing issue within Nepal’s political landscape, with factions such as the Maoist Centre vocally opposing it, and the Nepali Congress walking a tightrope between domestic political pressures and its international commitments.
Under the agreement, the U.S. committed $500 million to fund the construction of a 315-kilometer, 400-kilovolt transmission line and road upgrades on the East-West Highway. The transmission line, which was expected to connect multiple river basins to Nepal’s high-voltage grid, was seen as a game-changer for the country’s energy security. Similarly, the road upgrades would enhance transportation infrastructure, reducing travel times and fostering regional connectivity.
Despite the political risks, the Nepalese government had pushed forward with the compact, hoping it would provide a long-term solution to the country’s infrastructure woes. Yet, as February 14, 2025 saw an email from the MCC warning of payment suspensions, the project’s future seemed uncertain at best. The freeze had immediate consequences, halting key procurements and postponing operational activities, leaving Nepal to consider the daunting prospect of having to bear the full financial burden of the projects on its own.
The Cost of MCC’s Suspension
Though the U.S. government has suggested that the MCC’s operations could resume after a review of foreign assistance, the outlook for Nepal is grim. With a strained fiscal position, Nepal cannot afford to shoulder the entire cost of these projects, which are vital for the nation’s energy and transportation infrastructure. Furthermore, with the growing likelihood that the MCC will be permanently shuttered, Nepal risks being left with unfinished infrastructure projects and a lost opportunity for much-needed economic growth.
The road upgrades, too, were seen as essential to improving transportation efficiency, promoting trade, and facilitating access to remote areas of the country. With these projects now in jeopardy, Nepal faces a daunting task in securing alternative sources of funding and expertise to fill the void left by the MCC’s departure.
The MCC’s suspension has exposed deep fault lines in Nepal’s political system. The ruling coalition, which had to navigate a delicate balancing act between domestic opposition and international obligations, now finds itself facing the prospect of a failed partnership. Former Prime Minister Deuba, once optimistic about the MCC’s potential to drive Nepal’s development, now must contend with the fallout from this diplomatic and economic setback.
While the U.S. government has not completely ruled out the possibility of resuming the MCC program in Nepal, the uncertainty surrounding its future has already cast a long shadow over the country’s development trajectory. Nepal’s leadership must now consider how to navigate its future development needs without the backing of one of its most important international partners. The MCC’s closure would be a significant blow to Nepal’s aspirations, leaving a void that may prove difficult to fill.
Stalled Ambitions
For now, Nepal is left to pick up the pieces of a broken promise. The country’s future development, once reliant on the American grant, now appears uncertain. The hope that the MCC could serve as a catalyst for Nepal’s economic transformation is rapidly fading, replaced by the harsh reality that the nation’s ambitions may now be stalled—potentially for years to come.
The MCC-Nepal Compact, signed in 2017 and implemented in 2023, was poised to address some of Nepal’s most pressing economic bottlenecks. With a focus on enhancing energy transmission and modernizing road maintenance systems, the $697 million compact represented a transformative opportunity for Nepal’s infrastructure. Of this, $500 million came from the MCC, with Nepal committing $197 million. The planned construction of high-voltage electricity transmission lines and the modernization of over 300 kilometers of roadways were critical components.
However, with the MCC shutting down operations, the future of these projects hangs in the balance. Payments will be suspended, leaving the Nepalese government scrambling to chart a path forward. Now, no new projects will be approved, and the financial support pipeline will effectively drying up. For Nepal, a nation that has already invested significant resources to meet the compact’s requirements, the consequences are profound.
The closure of the MCC places an immense financial strain on Nepal, a country already grappling with a fragile economy. Completing the remaining components of the compact will require an additional $500 million—an amount that seems insurmountable given the country’s current fiscal constraints. The government is now faced with difficult choices.
The short-term consequences of this funding gap are stark. Delays in project completion are almost inevitable, and costs are expected to balloon as a result. Moreover, the government may be forced to reallocate resources from other critical sectors such as healthcare, education, and social services to keep these projects afloat. This raises the specter of increased inequality and reduced public trust in the government’s ability to deliver on its promises.
Worse yet, if alternative funding sources are not secured, the projects may remain incomplete. The sight of half-built roads and unconnected transmission lines would not only symbolize a failure of governance but also represent a colossal waste of resources.
Since 2017, Nepal has spent millions of dollars in preparation for the MCC compact, including funds allocated for planning, land acquisition, and initial construction. This investment has been a significant drain on the country’s limited resources. If the projects are left unfinished, these expenditures could become sunk costs with no tangible benefits.
Caught in the Crossfire
Critics argue that the government should have anticipated this scenario and developed contingency plans. Yet, the abruptness of the MCC’s closure has left little room for maneuver. Officials from Nepal’s Ministry of Finance have expressed cautious optimism about salvaging the projects, but the options are limited and fraught with challenges.
Beyond the financial implications, the closure of the MCC exposes deeper issues of governance in Nepal. Infrastructure projects of this scale require not only funding but also effective management, technical expertise, and long-term maintenance strategies. These are areas where Nepal has traditionally struggled, and the MCC’s withdrawal threatens to exacerbate these vulnerabilities.
The government’s capacity to implement large-scale projects independently is under scrutiny. Without the oversight and accountability mechanisms provided by the MCC, concerns about corruption and inefficiency are likely to resurface. Furthermore, the loss of MCC funding may undermine Nepal’s ability to attract future international investments, as potential donors grow wary of the country’s capacity to manage such initiatives.
The idea of completing the MCC projects without external assistance is daunting. Nepal’s economy, still recovering from the shocks of the COVID-19 pandemic and rising inflation, is ill-equipped to shoulder the burden. Domestic resource mobilization, though essential, can only go so far in addressing the shortfall.
To finance the remaining work, Nepal may need to increase its reliance on borrowing, both from international financial institutions and bilateral donors. This would add to the country’s growing debt burden, further limiting its fiscal flexibility. Alternatively, the government could explore public-private partnerships (PPP), but these come with their own set of risks, including potential conflicts of interest and lack of transparency.
Quiet Exit of U.S. Soft Power
The MCC fiasco did more than derail a major infrastructure program—it laid bare the waning of American soft power in Nepal. Once viewed as a trusted democratic ally, the United States now finds its credibility in decline, unable to counter growing narratives of geopolitical overreach. As public protests framed the MCC as a covert security pact, Washington failed to defend its position convincingly. The result: a major erosion of goodwill and a perception that the U.S. is out of touch with Nepal’s domestic pulse.
This soft power vacuum is not just a loss in diplomacy—it is a setback for democratic values. Civil society, once bolstered by Western engagement, now finds itself fragmented and sidelined. As American influence fades, China’s model of no-questions-asked support grows more attractive to decision-makers, even at the cost of transparency and public oversight. In a region where democratic institutions are still fragile, the U.S.’s retreat has left the door wide open for authoritarian-friendly narratives to gain traction.
Debt Trap Fears
With the MCC program shelved, Nepal has increasingly turned to China to finance its infrastructure dreams—but not without cost. Chinese-funded projects, such as the Pokhara International Airport, are now at the center of corruption allegations, raising fears that Beijing’s financial support could come with long-term strings. A recent parliamentary report by the Public Accounts Committee uncovered Rs 14 billion in irregularities in the Pokhara project alone, citing inflated costs and opaque contracting practices.
Unlike grants like MCC, Chinese assistance typically comes as commercial loans, and repayment terms are rarely publicized. Without institutional safeguards or proper scrutiny, these loans risk ballooning into liabilities. Nepal, already struggling with a trade deficit and declining foreign exchange reserves, could find itself locked into repayment schedules that compromise future fiscal freedom. As the West pulls back and China surges forward, the narrative of “debt diplomacy” becomes increasingly difficult to ignore.
China to Fill the Strategic Vacuum
With the American-led Millennium Challenge Corporation (MCC) compact now shelved amid political infighting and public mistrust, Nepal has opened the door wide for China to deepen its strategic foothold. What was once a high-profile $500 million grant aimed at building Nepal’s energy and road infrastructure has now become a symbol of lost opportunity and Western retreat. The absence of U.S.-backed development leadership has left Nepal’s infrastructure ambitions exposed and directionless—an opening China is keen to exploit. Through its Belt and Road Initiative, Beijing is actively positioning itself as the alternative, offering large-scale infrastructure projects with fewer strings attached and rapid rollout.
Chinese-funded ventures are increasingly seen as the only game in town. In the aftermath of the MCC’s rejection, China’s willingness to offer loans and technical assistance without democratic or transparency conditions gives it a clear upper hand. Where the U.S. faltered amid domestic Nepali skepticism and mixed messaging, China is steadily weaving itself into the country’s economic and political fabric. In doing so, it is not just building roads—it is building influence.
Navigating the Future
Nepal’s ability to navigate this crisis will depend on its resilience and adaptability. The government must urgently identify alternative sources of funding, whether through international donors, private investment, or domestic revenue generation. At the same time, it must prioritize the most critical components of the MCC projects to ensure that at least partial benefits are realized.
The closure of the MCC also raises broader questions about Nepal’s development strategy. For years, the country has relied heavily on foreign aid to finance its infrastructure needs. The MCC’s departure serves as a wake-up call, highlighting the need for greater self-reliance and more sustainable development models.
The end of the MCC marks a turning point for Nepal, forcing the country to confront its financial and governance challenges head-on. While the immediate impact is likely to be painful, it also presents an opportunity for Nepal to rethink its approach to development. By addressing systemic issues and building stronger institutions, the country can chart a more independent and sustainable path forward.
The road ahead will not be easy, but Nepal has faced adversity before and emerged stronger. The MCC’s closure may be the end of one chapter, but it could also be the beginning of a new era for Nepal’s development journey.
