The Trump administration’s decision on January 20 to pause all US foreign assistance funded by or through the State Department and the USAID, along with the recent halt in Millennium Challenge Corporation (MCC) payments, has sent ripples across the world, with Nepal feeling the impact particularly hard.

Initially, only aid from the USAID and State Department was suspended, according to the department. But the decision to freeze MCC disbursements was not publicly disclosed at the time.

On Tuesday evening, Nepal’s Ministry of Finance issued a statement stating that the MCC had notified the Nepal government that payments related to activities funded under the Nepal Compact have been halted, in compliance with a 90-day freeze imposed by an executive order of the US President on January 20, 2025.

According to the ministry, an email from the MCC dated February 14, 2025, informed Nepal that ongoing projects under the compact would be affected by the payment suspension. Nepal had signed the MCC Compact on September 15, 2017, which was ratified by Parliament in February 2022.

The compact includes construction of a 315-km, 400kV transmission line and road upgrades. The MCC allocated $500 million for the projects, while the Nepal government committed an additional $197 million. A portion of the $500 million was earmarked for road upgrades. Recently, the MCC board had approved an additional $50 million for the compact.

The funding freeze has raised concerns about project delays, as Nepal aims to complete all MCC-funded projects within the stipulated five-year timeframe, which began in August 2023. Officials are assessing the implications of the suspension and discussing possible measures to cut disruptions.

Experts said the Nepal government should assess the economic impact of losing US aid, as no country or financial institution will fill the vacuum left by the USAID and the MCC.

Initially, the US government had only notified Nepal of the aid pause for USAID, not MCC. The US side insisted that Trump’s executive order was unlikely to impact the Nepal compact.

But, with the latest decision to halt disbursements for at least for 90 days, the fate of the compact, which was already a politically-charged issue in Nepal before its parliamentary approval in February 2022, has become uncertain.

Signed in September 2017, the compact had been a divisive issue in Nepal. Its critics argue that certain provisions of the compact undermine the country’s sovereignty.

In Kathmandu’s political, bureaucratic and diplomatic circles, speculations were rife that the MCC funding would meet the same fate as USAID assistance. A senior Nepal government official, however, said, “We did not make the decision public until we got final confirmation from the MCA-Nepal.”

MCA-Nepal is a government agency responsible for implementing the MCC Nepal Compact.

The agency’s officials were aware of the new development some ten days back. “We are working as usual and there have been no changes such as fund cuts or staff layoffs,” said an official at the MCA-Nepal office. “However, payments after January 20 have not been made, and new procurements have been halted.”

The agency had re-launched the bid for construction of a 297 kilometer transmission line in November last year, with a bid submission deadline set for January 30. “There is no instruction or order to stop the procurement process, so the tender process continues,” said the official.

Responding to the Post’s queries, the US Embassy in Kathmandu said the MCC [headquarters] is complying with President Trump’s executive orders and guidance from the Office of Management and Budget (OMB).

“As part of this compliance, MCC-related activities, including disbursements, have been temporarily paused in accordance with the executive order issued by President Trump on January 20, 2025 and are under review,” said the US Embassy.

The US government remains committed to its partnership with Nepal and will continue to engage with the government of Nepal on the next steps once the review process is complete, said the embassy, expressing hope that the compact will continue once review is complete.

Former Finance Minister Surendra Pandey foresees a serious crisis following the US decision to pause disbursements. He also blames the Nepal government for its lack of preparations on how to mitigate the challenges emerging from the US aid suspension.

“The tender process is ongoing and it is under review, but in the meantime, the US side has paused payments,” said Pandey. “Do we have the capacity to take the MCC to court? Or can we continue the projects with our own resources?”

“If the contract process is terminated, we will have to pay fines to contractors. Also, we have already started land acquisition, which is a legal obligation the government must fulfill. Now, either the government must divert funds from other projects to MCC projects, or seek alternative funding sources. But can we afford to cut spending on other projects to fund MCC projects? Will Europe step in to invest if the US stalls assistance?” said Pandey.

With the country’s economy already under stress, the government has yet to assess possible ramifications of the US aid freeze.

Now the big question, as Pandey suggests, is: Who will fill the void left by the US?

The MCC is the biggest infrastructure grant in Nepal’s history, said Akhilesh Upadhyay, a senior fellow at the Centre for Strategic Affairs at the IIDS, a Kathmandu-based think-tank. “What will be the fate of the capital-intensive ongoing road upgrade and transmission lines projects?”

This should be seen in terms of more than monetary value, said Upadhyay. “How does Nepal now address its investment needs?”

Pandey expressed similar concerns.

“Neither Europe, India, nor China is going to fill that vacuum, and nor do we have the financial wherewithal to invest or give continuity to these projects on our own. We were not prepared,” said Pandey, the former finance minister. “Has our finance ministry reviewed the impact and explored alternatives?”

Finance ministry officials, meanwhile, told the Post that there has been no such review following the US decision to recalibrate its foreign spending.

After USAID announced aid suspension, the finance ministry notified that only four projects undertaken by the government of Nepal would be affected.

“The most important question now is whether the aid freeze will extend beyond the 90-day review period,” said Upadhyay, who is also a former Editor-in-Chief of The Post. “If it does, we could see some serious shifts in the South Asian geopolitical theatre and we may have to rethink our development paradigm altogether to generate lasting internal resources.”

Besides providing financial assistance, the US has for the past several decades supported Nepal in the health sector, including in malaria eradication, vaccination programmes, and, more recently, HIV/AIDS treatment, said Upadhyay. “People tend to overlook the humanitarian dimension of US assistance.”

“Second, America has been—not just in Nepal but globally—the leader in mainstreaming such ideas as human rights, democratic values and inclusion. The issue here is about more than just monetary aid. Who will fill in the political vacuum? First, does any other power have that capacity similar to America’s? Also, is there political will and incentive for other powers to step in?” Upadhyay says.

Officials at the finance and foreign ministries said that they are waiting for the final outcome of the US aid review.

Former Finance Secretary Rameshore Khanal believes the US will lift the sanction after 90 days. But USAID funds and priority areas will be cut down and adjusted to meet President Trump’s new priorities.

“I hope the US government will resume the operation of investment instruments as they have no basis to stop the [MCC] compact process. On USAID, they will make a realignment with Trump’s new priorities. Some USAID projects and programmes that are not compatible with Trump’s policy will be reviewed but MCC grants won’t be suspended,” claimed Khanal, who also heads a high-level economic panel that offers suggestions to the KP Oli government.