Trump’s mcc funds freeze a setback for nepal’s development aspirations

Trump’s mcc funds freeze a setback for nepal’s development aspirations

In 2017, the U.S. committed $500 million under the MCC-Nepal compact for electricity transmission, road upgrades, marking the largest American infrastructure grant to the country; analysts say the U.S. decision could impact Nepal in the geopolitical arena, with respect to India and China.

Three years ago, Kathmandu was caught in the crossfire of Washington-Beijing tensions over the Millennium Challenge Corporation (MCC), a multi-million American grant for Nepal.

While the United States warned of reviewing its overall ties with Nepal should Kathmandu fail to ratify the MCC-Nepal Compact from Parliament, Beijing referred to the grant as a “Pandora’s box.”

Within Nepal, politics was sharply divided, with some sections, particularly those holding extreme left and nationalist views, opposing the parliamentary ratification of the MCC. They argued that along with the MCC money, American boots would land in Nepal.

Signed in 2017, the U.S., under the compact, committed $500 million in grants for building electricity transmission lines and upgrading roads in Nepal.

Fast forward to 2025, a month after Donald Trump returned to the White House, Nepal’s Ministry of Finance (MoF) announced that it had been informed about the MCC funds freeze.

In a statement, the Ministry said the Nepal government was informed by the MCC that payment-related activities funded under the Nepal Compact had been halted in compliance with a 90-day freeze imposed by an executive order of the U.S. President on January 20.

When Mr. Trump froze USAID funds earlier in January, it was largely expected that the MCC, which the U.S. and Nepal signed during the American President’s first term in 2017, would continue.

Analysts now warn that if the funding is completely withdrawn, there will be broader implications for Nepal — not just in terms of infrastructure and development efforts, but also geopolitically, with respect to India and China.

Million-dollar question

With the U.S. fund freeze for the largest infrastructure assistance, the immediate question is: Who will fill that void, and how will it impact Nepal’s development efforts?

The natural answers could be China or India, Nepal’s two next-door neighbours and the second and fifth largest economies, or Nepal itself.

Sanjay Upadhya, a U.S.-based author and analyst, argues that neither India nor China has the capacity or readiness to fill a vacuum of this scale and scope. “We lack the resources to ensure the continuity of the projects,” he said.

Even if attempts are made, such projects take years of negotiations. The MCC itself was signed in 2017 after years of discussion.

Electricity transmission lines are one of Nepal’s major infrastructure projects, as the country aims to exploit its hydropower potential with a view to selling it to India, the biggest market in the south.

Mr. Upadhya suggests that Mr. Trump’s decision significantly impacts Nepal’s infrastructure initiatives and overall development efforts.

“With the construction of the transmission lines and the enhancement of Nepal’s road network under the Compact now on hold, uncertainty looms over their future,” Mr. Upadhya said. “This situation may postpone Nepal’s infrastructure development plans and result in costly contractual issues for the country.”

In June 2023, Prime Minister Narendra Modi announced that India would import 10,000 MW of electricity from Nepal. Accordingly, in January of the previous year, Nepal and India signed a power trade agreement for Nepal to export 10,000 MW of hydroelectricity to India over the next 10 years.

Given the hullabaloo over the parliamentary ratification of the MCC three years ago, analysts say the fund freeze represents a setback for both the donor and the recipient.

Binoj Basnyat, a strategic analyst and retired Major General of the Nepal Army, explains that the decision may erode trust in the U.S., which has been the biggest bilateral aid provider to Nepal since 1951.

“Nepalis may wonder what policy the U.S. is going to pursue with regard to Nepal,” said Mr. Basnyat. “But simultaneously, a review by the U.S. also gives Nepal, as a recipient, a chance to rethink its aid policy.”

The MCC is the largest American infrastructure grant for Nepal in history. Through USAID, the American assistance to Nepal since 1951 amounts to over $1 billion. In 2022, USAID and Nepal signed a five-year Development Objective Agreement worth $659 million. While the USAID fund pause will affect sectors like health, education, agriculture, climate, and women’s and children’s empowerment, the MCC halt directly affects the infrastructure area.

Difficult position

“The funding freeze places both countries in a difficult position. Nepal feels vulnerable about its control over its future,” said Mr. Upadhya. “The U.S. has experienced a blow to its reliability and standing. Nepal took the political risk of accepting it, the U.S. has now stepped back. This sends a contradictory message to other countries considering American aid.”

According to him, the freeze in funds could further polarise Nepal. “Opponents feel vindicated,” he said. “It may become increasingly challenging for Nepal to negotiate other international agreements.”

Beijing was suspicious of the MCC from the outset, believing it was Washington’s ploy to counterbalance the Belt and Road Initiative (BRI), to which Nepal signed up the same year the MCC compact with the U.S. was signed. Only recently, in December last year, Nepal and China signed a BRI framework deal, paving the way for investment and cooperation in Nepal under the Chinese scheme after both sides agreed on “aid assistance financing.”

According to Mr. Upadhya, China now has an opportunity to reaffirm its narrative that U.S. commitments are unreliable and that it is the most reliable partner. “While Beijing capitalises on a propaganda victory, Nepal could potentially risk further assistance from China,” he said.

India, Nepal’s traditional development partner in the region, remained conspicuously silent when Nepal signed up to the MCC and BRI.

Some say the U.S. reversal on its aid to Nepal could open the door for Beijing to make more aggressive inroads into Nepal, which could become a headache for India. Ties between Nepal and India appear to be at a standstill, with many viewing New Delhi’s reluctance to invite Prime Minister K.P. Sharma Oli even after six months in office as a sign of displeasure.

There are also concerns that the U.S. distancing itself from Nepal could pose a bigger challenge for Kathmandu in balancing its neighbours—India and China.