The future of the Millennium Challenge Corporation (MCC) hangs in the balance and there is no clarity on whether or how its Nepal operations will continue. Adding to this uncertainty, the MCC headquarters has proposed a significant budget cut for its global operations next year, which may affect projects in Nepal.

In April last week, after Elon Musk’s Department of Government Efficiency (DOGE) decided to shut down MCC’s global operations, there has been no official confirmation on whether its Nepal operations will continue or close. But Nepali officials remain hopeful that MCC projects in Nepal will get continuity.

Observers say the proposed budget cut could severely disrupt ongoing MCC projects in Nepal, which have already been facing a bleak future.

Amid this uncertainty, the MCC headquarters has proposed slashing its annual global budget from $930 million to $224 million, according to the MCC. Previously, the MCC had allocated US$500 million for two infrastructure-related projects in Nepal. The MCC operates in over 40 countries where it spends millions of dollars annually, but it remains unclear where compacts will continue and where they will be discontinued.

On May 30, the MCC headquarters in Washington DC proposed a new budget ceiling for its global operation by drastically cutting its annual budget. In the seven-page paper titled “Fiscal Year Congressional Budget Justification”, the MCC proposed only a $224 million annual budget for the year 2026. In the US, the federal government's fiscal year begins on October 1 and ends on September 30 of the following year.

The Millennium Challenge Account Nepal, which is responsible for executing two MCC projects, is aware of the proposed new budget, but has no clear idea of its possible ramifications. In the recent budget, the Ministry of Finance has allocated Rs5.68 billion for the two projects to be executed under the MCC grant.

According to the Ministry of Finance, out of the budget, Rs1.258 billion has been allocated for current expenditure and the remaining Rs4.437 billion for capital expenditure. The amount is expected to be spent on constructing cross-border transmission lines, the high-capacity substation under construction in Nuwakot, and road upgrade projects.

At a press conference on the new budget, Dhani Ram Sharma, joint secretary at the ministry and the head of its International Economic Cooperation Coordination Division, said the source calculations were based on the grant received as there has been no formal communication from the US administration to stop the projects.

According to him, earlier, the US had asked through an email not to add additional obligations to the projects, but later gave approval to partial continuation of the work. Although there was talk of revoking the Nepal compact, no official information had been received, he said.

The deadline to complete the two MCC projects in Nepal is five years. By the end of August, the MCC projects will have been in force for two years, leaving three years to complete them. The MCC had allocated US$500 million for two infrastructure-related projects, while the government of Nepal had allocated $197 million.

According to the seven-page document the MCC submitted to the US Congress, out of $240 million, no funds have been allocated for compact assistance and threshold programmes. The new budget proposes allocations for compact development/oversight ($91.5 million), compact development funding ($20 million), due diligence ($71.5), administrative expenses ($128 million), and office of the inspector general ($4.5 million). The document also states that $1.215 billion, which was a prior year balance, has been cancelled.

“We have no idea about the new proposal and we are yet to get any formal communication either,” said Finance Ministry spokesperson Shyam Prasad Bhandari.

The MCC headquarters has not communicated to the Nepal government about the continuation or termination of the MCA Nepal Compact despite its completion of the review months.

“We have only received an email where MCC sought a three-month work plan, which we are working on,” said Bhandari. The MCC headquarters also claimed that the MCC projects have effectively countered China's Belt and Road Initiative (BRI), of which Nepal is a signatory.

Former finance secretary Krishna Gyawali, who also worked with the MCC, stated that if the budget is slashed, it will affect country-wise allocations. “If the overall budget is being cut, it will affect Nepal projects too,” he added.

After going through the document, Gyawali told the Post that such a cut would have serious implications on project execution in Nepal.

“There is also no budget for compact development and implementation which means projects like Nepal’s that are about to take off could face a huge budgetary crisis. Plus, going through the paper, it looks like they will maintain only a skeletal structure of the project office in Nepal,” said Gyawali.

“The Millennium Challenge Corporation (MCC) requests $224 million for fiscal year (FY) 2026 to promote American prosperity through economic growth in partner countries. The Budget also includes a cancellation of $1.2 billion in prior year MCC unobligated balances, demonstrating a commitment to fiscal discipline and efficiency,” reads the paper, adding, “For more than two decades, MCC has invested in partner countries to create new opportunities for US investment, trade, and jobs, opening valuable opportunities for American businesses while effectively countering the growing influence of China’s Belt and Road Initiative (BRI).”

The paper also makes further arguments in favour of the MCC’s continuation.

“The MCC makes America safer by helping the United States and its businesses gain reliable access to critical minerals in partner countries—strengthening US supply chains and diminishing the strategic leverage of adversaries. MCC investments also address the root causes of illegal migration and violent extremism through strategic investments that promote stability and economic opportunity in vulnerable regions. MCC makes America stronger by offering a transparent, high-quality alternative to China’s BRI, enabling partner countries to avoid debt-laden, low-standard projects. MCC-funded infrastructure and economic reforms align with American interests and compacts are subject to the agency’s strict eligibility criteria,” said the seven-page paper.

“The MCC’s time-limited, five-year compacts are held to high standards and subject to suspension or termination if countries fail to advance American priorities,” reads the paper. All MCC investments must have a concrete return on investment (“ROI”) for Americans, such as increased profits for American businesses, the paper stated.

To justify the proposed budget, MCC stated that for fiscal year 2026, MCC will maintain its rigorous oversight and administration of active compact and threshold programmes, including programme reviews, portfolio management, activity modifications, monitoring, audits, and evaluations.

It also reveals that the MCC’s oversight functions were earlier managed by the USAID, which has also been closed down following a DOGE decision. The fiscal year 2026 budget assumes that oversight functions previously managed by USAID will shift to the State Department OIG, following the merger of State and USAID, said the document.

The MCC was established by Republican US President George W Bush in 2004 in order to reduce poverty and promote economic growth around the world.

“We wait for good news about the compact’s continuation,” Pushkar Mathema, information officer at MCA Nepal, said. “We have not even received official confirmation about the review, so we have little idea about the budget cut.”

Nepal and the MCC signed an agreement in September 2017 to execute energy and road upgrade projects, where the US would pump in $500 million in aid, while Nepal would inject $150 million. Nepal’s contribution was later increased to $197 million.

The total investment in the road upgrade and transmission line projects under the MCC has reached $697 million. It could have gone up to $749 as the MCC board had decided to put in another $50 million into the project to bridge the funding gap.