US completes foreign aid review; MCC-Nepal project moves ahead amid policy shift and funding uncertainty

KATHMANDU: The United States has completed a sweeping review of its foreign aid portfolio under the Trump administration’s “America First” doctrine, directly impacting programs under the Millennium Challenge Corporation (MCC), including its $500 million compact with Nepal.

While the MCC Compact with Nepal has been allowed to continue under a special exemption, its future funding—particularly an additional $50 million approved by the MCC Board in January 2025—remains uncertain pending decisions from both the U.S. Congress and the Government of Nepal.

In a statement released after the completion of the review, the MCC emphasized that the updated strategy will align U.S. foreign assistance with national interests, aiming to make the country “safer, stronger, and more prosperous.” Specific policy directions and budgetary decisions are now awaiting input from the MCC Board, the U.S. Congress, and consultations with partner nations like Nepal.

The five-year MCC Nepal Compact, launched on 30 August 2023 after a six-year delay since the original signing in 2017, is one of the largest U.S. grants ever committed to Nepal. Its primary objective is to develop Nepal’s transmission infrastructure and highway networks, aimed at strengthening the national economy and advancing regional electricity trade.

The Nepal government has contributed an additional $197 million to the project—up from the initially agreed $130 million—bringing the total project budget to $747 million.

Suspension and Selective Resumption of Aid

U.S. President Donald Trump had issued an executive order on January 20 directing a 90-day suspension of all U.S. foreign aid as part of the administration’s policy overhaul. Initially, MCC was exempted, but its funding was later included in the freeze, stalling aid disbursement globally, including to Nepal.

However, recognizing the project’s critical nature, the MCC allowed Nepal to continue essential procurement and operational activities beginning March 2025. Since then, implementation under the Millennium Challenge Account Nepal (MCA-Nepal)—the entity responsible for executing the compact—has resumed across various components.

MCA-Nepal, in a statement, welcomed the U.S. government’s decision to permit continuation of the project under a “special exception,” even as larger foreign aid programs remain suspended.

Physical Works Underway, But Challenges Remain

Construction activities have begun in several locations. Contracts for three major substations—Tanahun (Damauli), Nuwakot (Ratmate), and Nawalparasi—have been issued. Additionally, work is underway on an 18-kilometer transmission line segment linking the New Butwal substation to the Indian border, a critical segment for cross-border energy trade.

Tender processes for the remaining 297 kilometers of transmission lines are in the final stages of evaluation. This comes after a previous 315-km tender had to be scrapped when the quoted prices exceeded estimated costs by over 60 percent—highlighting the challenge of cost escalation and procurement risk.

While the MCC Board approved an additional $50 million in January 2025 to cover such overruns, its disbursement remains contingent on approvals from both Nepal’s cabinet and the U.S. Congress.

According to data published on ForeignAssistance.gov, Nepal has already incurred obligations amounting to $471.3 million under the MCC Compact across fiscal years 2023 and 2024. However, as per compact regulations, any unspent funds by the project’s end date will be returned to the U.S. Treasury.

Political Journey of the MCC Compact in Nepal

The road to implementing the MCC Compact in Nepal has been politically turbulent. Though Nepal became eligible for MCC assistance in 2014, it took three more years to secure the $500 million grant after intense diplomatic engagement. The agreement was signed in September 2017.

However, parliamentary ratification took nearly five more years, largely due to political opposition and widespread misinformation campaigns that framed the agreement as a threat to national sovereignty. The compact was finally ratified on 27 February 2022, paving the way for the formal start of implementation in August 2023.

The project is currently being executed through MCA-Nepal, established under Nepal’s Development Board Act, 2013.

Strategic Relevance for the U.S. and Nepal

The MCC is a U.S. government agency created in 2004 to fight global poverty and support economic growth through targeted development projects. Although its primary focus is development, the MCC also serves strategic American foreign policy interests by promoting governance reforms, infrastructure development, and U.S. soft power.

The Nepal compact fits this framework. By enhancing Nepal’s cross-border energy connectivity and internal road infrastructure, the U.S. seeks to not only foster economic prosperity in Nepal but also counterbalance competing regional influences.

The U.S. Embassy in Kathmandu and MCC headquarters in Washington continue to monitor the compact’s implementation, but the uncertainty surrounding further disbursements and rising project costs has left the Nepal government in a bind.

The failure to secure timely cabinet approval for the additional $50 million could jeopardize key infrastructure segments, especially at a time when the country is struggling with energy evacuation challenges, growing demand, and limited transmission capacity.

Broader Implications for Nepal’s Aid Landscape

The MCC funding debate is emblematic of Nepal’s broader challenges with foreign aid management. While the country remains heavily reliant on donor grants and concessional loans, project implementation often suffers from delays, politicization, and lack of clarity on long-term strategic priorities.

As MCC represents one of the most structured, performance-based foreign grants Nepal has ever received, its successful implementation—or failure—will likely have far-reaching implications on future bilateral and multilateral funding opportunities.

Should the additional funding be denied or the project face delays, it may deter similar scale investments in Nepal’s energy and infrastructure sectors in the future.