Why the MCC's Continuation is in the Interest of Nepal — and the US

The Diplomat

08-07-2025

After putting MCC projects on hold in January this year, the Trump administration recently said that its projects in Nepal would go ahead.
The Millennium Challenge Corporation (MCC), an American bilateral foreign aid agency, has been mired in controversy in Nepal since the get-go.
It signed a $500 million compact with Nepal in September 2017. Proposed projects aimed to maintain road quality, increase the availability and reliability of electricity, and facilitate cross-border electricity trade between Nepal and India, which in turn would 'spur investments, accelerate economic growth, and reduce poverty.' As part of the deal, besides the $500 million the Americans were giving, Nepal would pitch in $197 million for the completion of the MCC projects.
The projects ran into controversy after senior American officials started linking them to the Indo-Pacific Strategy (IPS), an American military construct designed to curtail China's rise. The common sentiment was that Nepal should not be a part of any military or strategic pact, especially one that harms its relations with China, the large neighbor to the north.
Early in 2022, senior American officials like the MCC's then-Vice President Fatema Z. Sumar and the then-U.S. Assistant Secretary of State Donald Lu threatened Nepal's political leadership that the failure to ratify the MCC on time could lead to a 'review' of America's ties with Nepal.
The compact's stipulation that future disputes in the projects would be settled in line with the compact's provisions — and not Nepal's domestic laws — also irked Nepalis.
At the height of the MCC disputes in 2022, Nepali political leaders, especially senior hands in the country's largest party, the Nepali Congress, strongly backed the MCC projects, even when it was not a popular thing to do. Many left-leaning leaders, too, lent their tacit support to the compact — provided it was amended before parliamentary ratification.
Eventually, a middle way was found: Nepal's parliament would ratify the compact while also passing an accompanying 'interpretative declaration.' Among other things, the declaration clarified that the compact's endorsement did not mean Nepal will be 'a part of any United States' strategy, military or security alliance including the Indo-Pacific Strategy.' And in case of disputes, the Constitution of Nepal would prevail over the compact.
The ratification came at the end of 2022, and the Americans accepted the interpretative declaration, clearing the way for project implementation. Nepal's interests had been secured and the country had locked in an advantageous deal.
First, the MCC projects would be built on grants, thus creating no additional liability on the Nepali state. Second, its time-bound nature would be a breath of fresh air in a country where vital infrastructure projects tend to be delayed by years or even decades. Third, as the power lines being built with American money would be used to take Nepal's excess energy to India, it would help Nepal realize its old dream of prospering through the export of its electricity.
Then, Donald Trump came to power in January 2025 and declared that all American aid projects, including the MCC, had been put on hold. This created confusion in Nepal as it was unclear whether the funds for Nepal would be exempted. In fact, the common belief was that the Nepal compact was dead and buried — even though it had been signed during Trump's first term as U.S. president.
Nepal's liberal-minded politicians had staked their careers and credibility to push for the compact's ratification—and now the Americans were seemingly backing out. Pulling the plug on the compact would thus have made it difficult for the Nepali political class to endorse any future American project or funding.
Amid this uncertainty, in the middle of June, the U.S. Embassy in Kathmandu announced that Nepal had been exempted from budget cuts and the MCC projects were still scheduled for completion by their original August 2028 deadline.
The announcement was timely. The projects' cancellation would have damaged bilateral ties and harmed Nepal's interests.
The U.S. helps balance the oft-overwhelming influence of India and China, Nepal's two big (and only) neighbors, which is why the U.S. is often called Nepal's 'sky' or 'third' neighbor.
When India blockaded landlocked Nepal in 2015-16, the United States consistently highlighted the resulting hardships of Nepali people, helping build international pressure on India to quickly lift the embargo.
Even for the United States, reneging on the compact would have backfired. (It still could if Trump changes his mind again.) If their goal is to check China's rise in the region, it can only be done by winning the confidence of smaller countries like Nepal and helping them in their development endeavors. The lofty democratic ideals American officials like to emphasize tend to grate when not backed by such solid support.
Of late, the U.S. has taken some dubious decisions like the suspension of visa interviews for Nepali students wanting to study in the U.S., and shutting down the USAID that was supporting key health initiatives in Nepal. But the continuity of the MCC projects suggests the Americans are not 'abandoning' Nepal. Even more importantly for Nepalis, the MCC's presence in Nepal undercuts the 'foreign policy myth' that the U.S. views Nepal through Indian lens.