KATHMANDU: Following the suspension of all projects under the United States Agency for International Development (USAID), the U.S. government has now halted the $500 million Millennium Challenge Corporation (MCC) Compact for Nepal.

The grant, designated for the construction of a 400 kV power transmission line from Ratamate in Nuwakot to Bardaghat in Nawalparasi, is now in limbo as Washington reassesses its foreign aid priorities.

The decision comes as U.S. President Donald  Trump’s 90-day freeze on international aid, issued on January 20, 2025, takes effect.

This suspension poses significant financial challenges for Nepal, which relies heavily on external loans/funding for infrastructure development.

Further complicating the situation are the priorities of newly established Department of Government Efficiency (DOGE), which is spearheading a sweeping overhaul of U.S. spending.

As DOGE implements cost-cutting measures and reshapes development aid priorities, the fate of U.S.-funded projects in Nepal remains uncertain. With both USAID and MCC support effectively frozen, Nepal now faces an uncertain future regarding critical U.S. assistance.

The MCC Compact, ratified by Nepal’s Parliament on February 27, 2022, after months of political turmoil, protests, and misinformation campaigns, has long been a point of contention. Now, its suspension presents yet another challenge for Nepal’s government.

Here’s everything you need to know about the MCC Compact, its suspension, key questions, and the broader implications for Nepal.

Why is MCC suspended in Nepal?

On February 14, 2025, the Millennium Challenge Corporation (MCC) informed Nepal that ongoing projects under the compact agreement would be affected by a payment suspension.

MCC officially notified Nepal’s Ministry of Finance that all payments related to activities funded under the Nepal Compact have been halted. This suspension complies with a 90-day freeze imposed by an executive order of the US President on January 20, 2025.

What is the MCC Nepal Compact?

The MCC Nepal Compact is a five-year, $500 million grant agreement signed between the Government of Nepal (GoN) and the Millennium Challenge Corporation (MCC) on September 14, 2017.

As part of the agreement, the Government of Nepal is contributing an additional $130 million, bringing the initial total project value to $630 million.

However, due to delays and rising costs following the Russia-Ukraine war, project expenses have significantly increased.

To address this, both Nepal and the MCC approved additional funding, raising the total Compact value to $747 million.

The Compact primarily focuses on improving Nepal’s energy and transportation infrastructure to support economic growth and development.

What is the future of MCC in Nepal?

The future of the MCC Nepal Compact remains uncertain as the U.S. government, under the Trump administration, is reviewing its foreign aid programs.

The U.S. has suspended financial aid to Nepal through two major channels: the Millennium Challenge Corporation (MCC) and the United States Agency for International Development (USAID).

Under the MCC agreement, either party can terminate the contract. If the U.S. government decides to cancel the agreement, Nepal will have no legal recourse. Since taking office, President Trump has prioritized cutting programs that do not align with his policies.

The White House’s Department of Government Efficiency (DOGE), led by Elon Musk and created on January 20, has been tasked with reducing federal spending, which may impact MCC projects in Nepal.

Currently, all MCC-related funds have been frozen, making the future of the project uncertain.

On February 14, the MCC suspended its $500 million grant for constructing a 400 kV power transmission line from Ratamate in Nuwakot to Bardaghat in Nawalparasi.

These suspensions are a significant setback for Nepal, which relies heavily on foreign aid for development.

The MCC grant was one of the largest ever provided to Nepal and was expected to play a crucial role in strengthening the country’s energy sector. While the duration of the suspension is unclear, it could be lifted if the program receives the necessary approvals.

What impact will the MCC suspension have on Nepal?

The funding freeze raises concerns about project delays, as Nepal aims to complete all MCC-funded projects within the stipulated five-year timeframe, which began in August 2023.

Core project work is ongoing, and the suspension could lead to cost inflation and time overruns.

Nepal has yet to fully assess the implications of the suspension or prepare mitigation measures, as the MCC operates under a fixed framework. It remains unclear how long the suspension will last.

While the US President’s 90-day hold applies to all international aid, it could be extended or lifted earlier than expected.

How much funding has Nepal received from MCC so far?

So far, Nepal has received $37,487,084 from the Millennium Challenge Corporation (MCC).

According to a written statement provided by Millennium Challenge Account Nepal (MCA-Nepal), this amount, when converted to Nepali currency, totals Rs. 4.653 billion.

Since the fiscal year 075/76, MCC has been providing funds to MCA-Nepal for various purposes, including project preparation, office operations, and employee salaries.

Over the years, different amounts have been granted, such as $7.056 million in 075/76, $2.365 million in 076/77, $4.531 million in 077/78, $3.171 million in 078/79, $5.305 million in 079/80, and $15.057 million in 080/81.

However, these figures do not include the funds allocated for the current fiscal year. For the ongoing fiscal year, the Government of Nepal has allocated Rs. 13.361 billion for the project.

What is the progress on the substation projects?

MCA-Nepal has signed contracts for the construction of three major substations. The New Butwal Substation contract was signed on Baisakh 27, 2081, for $35.51 million.

Similarly, the Ratamate-Nuwakot Substation contract, worth $51.6 million, was signed on Asar 1, 2081. Another contract for the New Damauli-Tanahun Substation, valued at $38.89 million, was signed on Shrawan 16, 2081, and construction is currently underway.

What is the current status of the MCC project in Nepal, and what progress has been made so far?

According to MCA Nepal, contract agreements have been signed for the construction of three substations. A contract was signed on 081 Baisakh 27 for the construction of the New Butwal (Nawalparasi West) substation at a cost of $35.51 million. Similarly, a contract worth $51.6 million was signed on 081 Asar 1 for the Ratamate-Nuwakot substation, while another contract for $38.89 million was signed on 081 Saun 16 for the New Damauli-Tanahun substation, which is currently under construction.

Among these, a contract agreement worth $12.36 million was signed on 14 Bhadra with India’s Transrail Lighting Limited for the construction of the New Butwal–Nepal/India border transmission line.

Meanwhile, MCA Nepal issued a global tender on 12 Mangsir for the remaining three transmission lines, covering 297 km. The deadline for proposal submissions is February 19, 2025 (today, Wednesday).

Regarding substations, preparations are underway for the construction of 400 kV substations at Ratamate, New Damauli, and New Butwal, for which contracts have already been signed.

The contracts were awarded at $51.5 million for Ratamate, $38.89 million for New Damauli, and $35.51 million for New Butwal. The contractors have already received an advance payment of nearly 30%.

In the road sector, the contractor selection process is ongoing for special maintenance of the 40 km Dhankhola–Lamahi section.

A total of 13 proposals were submitted under the global tender, which are currently under internal evaluation. However, the tender process for the Narayangadh-Muglin road section maintenance has yet to be initiated.

What happens if MCC withdraws from Nepal?

If MCC withdraws from Nepal, the construction of a 315 km double-circuit 400 kV transmission line—which is critical for connecting Nepal with India’s transboundary electricity grid—will face uncertainty.

However, Nepal has no option but to develop the transmission line as soon as possible to secure investments from private hydropower companies that rely on exports to India.

The transmission line will enable Nepal to export electricity to India’s Real-Time Market (RTM) and also import electricity when needed.

This trade will help Nepal balance its trade deficit with India and could pave the way for future hydropower collaborations with India and Bangladesh.

Since Nepal’s government has limited financial resources to fully fund the project on its own, alternative options may be explored, such as private sector involvement, seeking investment from India, or finding other international funding sources.

The MCC-Nepal Compact was set to play a crucial role in distributing clean energy from Nepal’s hydropower projects to millions of homes and businesses.

Given that export agreements with India and Bangladesh have already been secured, the Nepal government must ensure the transmission infrastructure is built—regardless of MCC’s involvement—to achieve its national energy and economic goals.

Is there a guarantee that India will purchase electricity from Nepal?

Yes. Nepal has secured an electricity deal with India. In January 2024, Nepal and India signed an agreement to export 10,000 megawatts of electricity to India over the next decade.

The MCC-funded transmission line will enable Nepal to expand electricity exports to India, strengthening cross-border energy trade.

Electricity trade between Nepal and India has significant potential, and transmission infrastructure is the backbone of this trade.

The 2014 Power Trade Agreement (PTA) between the Government of Nepal and the Government of India laid the foundation for cross-border electricity trade.

The new MCC-funded transmission line is expected to enhance regional connectivity and could facilitate energy trade with other countries as well.

Is MCC aid to Nepal higher than the previous $500 million?

Yes. In the first week of January 2025, the Millennium Challenge Corporation (MCC) Board of Directors approved an additional $50 million in funding for the Nepal Compact, bringing the total Compact value to $747 million.

This additional funding is intended to cover increased costs associated with the Compact’s Electricity Transmission Project and ensure its successful implementation.

A notice published in the US Federal Register regarding the First Amendment to the Compact with Nepal states that representatives of the Nepal and US governments are expected to finalize the amendment in January 2025.

This amendment was made under the provisions of the Millennium Challenge Act of 2003.

Is Nepal contributing additional costs to the MCC project?

Yes. Initially, the agreement stipulated that the MCC would provide Nepal with a $500 million grant, while the Nepalese government would contribute $130 million, bringing the total MCC project cost to $630 million.

However, a supplemental agreement signed in May–June 2023 increased Nepal’s financial responsibility. Under this new arrangement, Nepal must contribute an additional $67 million, raising its total contribution to $197 million.

Originally, Nepal was expected to cover 20.63% of the total MCC project cost, but with this increase, its share has risen to 28.26%, equivalent to NPR 900 million.

On May 23, 2023, the Council of Ministers endorsed the Finance Ministry’s proposal to revise the MCC agreement and increase Nepal’s funding share. Based on this decision, the Nepal Electricity Authority (NEA) and MCA-Nepal signed a supplemental agreement on May 30, 2023 to formalize the revised financial commitments.

What Challenges is MCC Facing in Nepal?

Before 90-day suspension, the Millennium Challenge Corporation (MCC) is encountering several challenges in Nepal, ranging from political opposition to land acquisition issues and procedural obstacles.

The MCC still faces resistance from radical left and far-right groups, who argue that the agreement threatens Nepal’s sovereignty.

While major political parties, both in the ruling coalition and the opposition, have not taken a strong stance, they have remained largely silent rather than actively supporting the project.

However, some Maoist splinter groups continue to protest against the MCC, urging local communities to resist its implementation and creating localized disruptions.

Land acquisition remains another significant hurdle. The MCA-Nepal, responsible for executing the MCC project, is struggling with challenges similar to those encountered in past infrastructure projects.

Many landowners are demanding higher compensation, delaying the process. Additionally, resistance from forest user groups against tree-cutting has further complicated matters.

Local governments are also using the situation to bargain for their own interests, adding another layer of difficulty.

The determination of compensation rates for land falling under the right of way has yet to be fully settled, leading to further disputes.

While the 315 km transmission line under the MCC primarily passes through rural areas with sparse settlements, minimizing large-scale resistance, scattered opposition still exists.

Some politically influenced local groups are attempting to create obstacles. Although the project is progressing, these challenges continue to raise concerns about delays and potential cost overruns.

When and why was the Millennium Challenge Corporation (MCC) formed?

The Millennium Challenge Corporation (MCC) was formally established on January 23, 2004, as part of a new approach to global poverty reduction under U.S. President George W. Bush.

The idea for MCC emerged after the 9/11 terrorist attacks, when the U.S. government sought to reform foreign aid by making it more accountable and results-driven.

US President Bush first introduced the concept at the Inter-American Development Bank meeting on March 14, 2002, calling for a “new compact for development” with accountability for both donor and recipient countries.

Unlike USAID and Bretton Woods institutions, MCC was designed as an independent agency focused on providing grants—not loans—to countries with strong economic policies, good governance, and investment in their citizens.

Where does MCC work?

Since its first agreements in 2005 with Cabo Verde, Georgia, Honduras, Madagascar, and Nicaragua, MCC has expanded to 47 low-income and lower-middle-income countries across six continents, delivering nearly $17 billion in aid.

The agency funds large-scale infrastructure, energy, and economic development projects that align with the Sustainable Development Goals (SDGs). MCC’s programs have helped improve governance, build roads, expand electricity access, and lift million of people out of poverty worldwide.

When and How Was the MCC Compact Passed in Nepal’s House of Representatives?

After years of political disputes and months of turmoil, Nepal’s House of Representatives ratified the MCC Compact on February 27, 2022, along with a 12-point interpretative declaration aimed at addressing concerns raised by protesters.

The ratification came after prolonged debate, intense negotiations, and diplomatic pressure from the United States.

What Problems Did MCC Face in Nepal Before Parliamentary Endorsement?

Before its approval, the MCC Compact faced widespread protests, political controversy, and diplomatic maneuvering in Nepal.

The agreement became a highly divisive issue in Nepal, with street demonstrations, misinformation campaigns, and opposition from various political factions. Protesters, including ultra-nationalists and leftist groups, accused the agreement of undermining Nepal’s sovereignty.

Demonstrations took place near the Parliament building, the US Embassy, and the Prime Minister’s residence.

The situation intensified when Chinese intelligence operatives were suspected of fueling anti-MCC narratives through their local proxies.

An investigative story by Khabarhub digital portal revealed that China’s Ministry of State Security (MSS) played a role in manipulating public perception against the MCC.

The United States actively engaged in diplomatic efforts to ensure the MCC’s ratification.

US Assistant Secretary of State for South and Central Asia, Donald Lu, visited Nepal in November 2021, meeting with top political leaders, including CPN (Maoist Center) Chairman Pushpa Kamal Dahal, then Prime Minister Sher Bahadur Deuba, and CPN-UML Chairman KP Sharma Oli. Similarly, MCC Vice President Fatema Z. Sumar and Deputy Vice President Johnathon Brooks visited Kathmandu in September 2021 to push for political consensus.

In November 2019, the Indo-Pacific Strategy document explicitly mentioned the MCC as a tool to enhance American economic prosperity, sparking political unease in Nepal.

This fueled suspicions among Nepal’s communist political bloc, which began questioning whether the MCC Compact was purely a development program or a geopolitical instrument of the US.

Amid this controversy, an internal power struggle erupted within the then-unified Nepal Communist Party (NCP), at that time jointly led by KP Sharma Oli and Pushpa Kamal Dahal.

The MCC became a politically divisive issue, further deepening rifts within the party and intensifying national debate.

The MCC compact was initially registered in the House of Representatives for approval in July 2019, but it remained stalled for years due to opposition from the then-unified Nepal Communist Party (NCP), which later split into three factions.

In February 2020, a high-level NCP task force led by Former Prime Minister Jhalanath Khanal recommended that Nepal should not move forward with the MCC without amendments. However, the MCC made it clear that the agreement could not be amended once signed.

Controversy also escalated after US State Department official David J. Ranz, during his visit to Nepal in May 2019, stated that the MCC was part of the Indo-Pacific Strategy.

This statement deepened suspicions among Nepal’s pro-China, pro-royalist and far-left political groups, who claimed the MCC would undermine Nepal’s sovereignty and potentially allow US military intervention.

Many politicians questioned why MCC required parliamentary ratification, unlike other grants and foreign aid. Critics also alleged that only portions of the agreement were made public, fueling further distrust.

Despite the protests and political resistance, the MCC Compact was eventually approved due to strong US diplomatic pressure, strategic negotiations, and internal political consensus among Nepal’s key parties.

However, opposition and misinformation surrounding the agreement persist even after its ratification.

When did the MCC Compact officially take effect in Nepal?

The Millennium Challenge Corporation (MCC) Compact officially entered into force in Nepal on August 30, 2023.

Originally, Nepal and the US had agreed on June 30, 2020, as the entry-into-force (EIF) date.

However, delays in parliamentary ratification due to political controversies pushed the timeline back by more than three years, creating uncertainty around the US assistance program.

To mark the launch of the MCC Nepal Compact, Cameron Alford, MCC’s Vice President of Compact Operations, visited Nepal. The EIF was celebrated with a grand event at a hotel, followed by an elaborate dinner reception.

What is the Millennium Challenge Account Nepal (MCA-Nepal)?

MCA-Nepal is a government-owned development board established in April 2018 (Baisakh 2075 BS) under Nepal’s Development Board Act, 2013 BS (1956 AD). It is responsible for implementing the MCC Nepal Compact projects.

Who oversees the operations of MCA-Nepal?

MCA-Nepal is managed by an Executive Director, supported by directors, managers, specialists, and staff. The Board of Directors, chaired by the Secretary of the Ministry of Finance, provides governance and includes representatives from the Ministry of Finance, Ministry of Energy, Ministry of Physical Infrastructure and Transport, and Nepal Electricity Authority (NEA), among others.

What role does the Government of Nepal (GoN) play in program implementation of MCC?

The Government of Nepal plays a central role in the MCC Compact’s implementation. MCA-Nepal, established with the approval of the Council of Ministers in April 2018, operates as a government entity.

How many people are working at MCA-Nepal, and how many jobs will the program create?

Currently, around 60 staff members work at MCA-Nepal. During the construction phase, the program is expected to provide direct employment to approximately 7,500 people over the project duration.

Is MCA-Nepal exempt from paying taxes?

The MCC grant is tax-free under the agreement. However, MCA-Nepal staff pay income tax as per Nepal’s regulations.

Goods, equipment, and services procured through the MCC grant are exempt from customs duties and other taxes since MCA-Nepal is a non-revenue-generating entity.

What is the scope of the Electricity Transmission Project under MCA-Nepal?

The project will construct approximately 315 kilometers of double-circuit, high-capacity 400 kV transmission lines and establish three new electricity substations. It will also provide technical assistance to the GoN for various energy sector initiatives.

Which districts will the transmission lines pass through?

The transmission lines will pass through:

Kathmandu, Sindhupalchowk, Nuwakot, Dhading, Makwanpur, Chitwan, Tanahun, Palpa, Nawalpur, and Parasi districts.

Who will own the land acquired for the Electricity Transmission Project after five years?

Land for the transmission project will be acquired under Nepal’s Land Acquisition Act, 2034 BS, and will remain under the Government of Nepal’s ownership.

What is the scope of the Road Maintenance Project?

This project focuses on maintaining commercially important roads by introducing new road maintenance technologies. It is expected to reduce maintenance costs and travel time.

Which roads will be maintained and improved?

The project will focus on the East-West Highway in Dang District. The pilot phase covers the Dhankhola to Lamahi section, with plans to extend to the Lamahi to Shivakhola section. In total, approximately 77 km of roads will be maintained.

What is the Millennium Challenge Corporation (MCC)?

The MCC is an independent US foreign assistance agency that provides grants to developing countries committed to good governance, economic freedom, and investing in their people.

How many countries have implemented MCC programs?

Since its establishment in 2004, MCC has signed 37 Compacts with nearly 30 countries, providing over $13 billion in grants. Of these, 25 Compacts have been completed, while others are still in progress.

Why was parliamentary ratification of the MCC Nepal Compact necessary?

Under Nepal’s Treaty Act (1990), an international agreement must be ratified by Parliament to have a legal status in Nepal. Nepal’s Ministry of Law, Justice, and Parliamentary Affairs advised that MCC ratification was necessary to align with this legal framework.

Which other international agreements have Nepal’s Parliament ratified?

Nepal’s Parliament has ratified several international agreements, including:

• Protocol on Accession to the World Trade Organization
• Charter of the United Nations
• Vienna Convention on Diplomatic Relations

Recent ratifications include:

• International Agreement for the Establishment of the University for Peace
• Regional Cooperative Agreement for Research, Development, and Training Related to Nuclear Science and Technology (2017)
• Nagoya Protocol on Genetic Resources and Fair Benefit Sharing
• Convention for the Unification of Certain Rules for International Air Transport
• BIMSTEC Convention on Counterterrorism and Transnational Crime

What will happen to MCA-Nepal after the program period ends?

MCA-Nepal is required to complete all projects under the Compact within five years from the Entry into Force (EIF) date. After project completion, the government may:

1. Dissolve MCA-Nepal, OR
2. Reassign its responsibilities under a new name.

All assets and properties will be transferred to the relevant line ministry or a designated entity.

Will the MCC Compact override Nepal’s Constitution?

No, the Compact will not override Nepal’s Constitution. Under Nepal’s International Treaty Act, if any provision in an international agreement contradicts local laws, it is treated as equal to local laws only in the context of implementation.

However, Nepal’s Constitution explicitly states that any agreement or treaty that contradicts the Constitution will be nullified to the extent of the contradiction.

Why does the MCC Compact have so many preconditions?

The preconditions were mutually agreed upon by Nepal and MCC to ensure smooth implementation and prevent disruptions after work begins. Large infrastructure projects often face time and cost overruns.

MCC’s model aims to minimize these risks by completing critical preparatory activities before the project starts.

What is host country ownership?

Host country ownership means that Nepal, through MCA-Nepal, is responsible for implementing the project, with MCC providing oversight and assistance. This model is a standard feature of all MCC Compact programs worldwide.

What process did Nepal follow to secure the Compact?

Nepal was selected by MCC’s Board of Directors as eligible for a Compact in 2014. The Government of Nepal (GoN) then worked with MCC to design a program addressing key economic constraints. The Compact was officially signed on September 14, 2017.

How was the MCC Nepal Compact designed?

The Compact is based on a 2014 report jointly prepared by the GoN and MCC, identifying Nepal’s main barriers to economic growth.

A detailed feasibility study conducted in 2016 further refined the scope of the program, prioritizing two key areas: electricity transmission and road maintenance.

Does MCC align with the U.S. National Security and Defense Strategy?

The MCC Nepal Compact is an independent agreement between MCC and the GoN. This partnership predates the Indo-Pacific Strategy.

The Compact is a non-military agreement, and under U.S. law, MCC funding cannot be used for military assistance or training.

Does MCC own intellectual property (IP) rights to the Nepal Compact?

No. The Government of Nepal (GoN) will own all intellectual property (IP) developed under the Compact.

However, while retaining ownership, the GoN will grant MCC the right to use these IPs to improve future Compact activities without charging fees.

Does the MCC Nepal Compact require India’s approval?

No. The MCC Compact does not require approval from the Government of India.

However, Nepal and India must collaborate to construct a 120 km transmission line in Indian territory to connect with Nepal’s transmission network. A similar agreement was made for the Dhalkebar-Muzaffarpur Transmission Line.

Who has the authority to audit the Compact?

Both the GoN and MCC have audit rights. Nepal’s District Treasury Controller Office and the Office of the Auditor General have conducted financial audits of the Compact. Audit provisions are detailed in Section 3.8(a) of the Compact.

Can the U.S. unilaterally terminate the Compact?

No. Either Nepal or the U.S. can terminate the Compact at any time with a 30-day written notice. Termination provisions are outlined in Section 5.1(a) of the Compact.

Why is MCC funding necessary if Nepal can take loans to build infrastructure?

MCC funding is a grant, meaning Nepal does not have to repay it. In contrast, loans require repayment with interest, which increases the financial burden on the country.

The MCC model allows Nepal to develop infrastructure without accumulating debt.

How long will the Compact run in Nepal? Will it stay indefinitely?

The MCC Compact will run for exactly five years from the start of implementation.

However, the project is expected to be completed within three years and six months.

After completion, project assets will be handed over to Nepal. Some provisions, such as office closure.

Is MCC against Nepal’s national interest?

No. Since 2011, successive governments in Nepal have supported the MCC Compact. The program is designed to improve Nepal’s electricity and transport infrastructure, which directly benefits Nepal’s national interest.

Is MCC affect Nepal’s foreign policy of non-alignment?

No. The Compact does not require Nepal to join any alliance. Its sole purpose is to support Nepal’s economic growth and poverty reduction.

Why did MCC and the GoN spend money on projects before the Compact’s Entry into Force (EIF)?

Early expenditures were necessary for project preparation, including feasibility studies, land acquisition, and environmental assessments. These preparatory tasks ensure timely implementation, as U.S. funding is strictly limited to five years from the start of the Compact.

What is the difference between the preparatory phase and the implementation phase of the MCC Nepal Compact?

The Compact follows a two-phase approach:

1. Preparatory Phase – Includes land acquisition, grievance redress, environmental impact assessments (EIA), and feasibility studies. These activities ensure that construction begins without delays.
2. Implementation Phase – The actual construction and execution of projects.

The preparatory phase ensures readiness for implementation but is not part of the five-year Compact timeline.