The decision to suspend the MCC project and cut US assistance to Nepal comes amid broader efforts by the Trump administration to reduce overseas spending. In the United States, the Trump administration has shut down multiple USAID programs, citing financial constraints and inefficiency.

US President Donald Trump has labelled USAID’s aid for Nepal as fraudulent, leading to the cancellation of two major grants allocated for the South Asian nation. During a White House press conference, Trump criticised the US funding for Nepal’s federalism initiative, calling it a misuse of American taxpayers’ money.

“$20 million for ‘fiscal federalism’ in Nepal. Listen to these numbers. This is all fraud,” Trump declared. He further questioned the necessity of a $19 million grant for biodiversity conservation in Nepal. Following this statement, the Trump administration officially revoked both grants on February 16.

The decision to terminate these grants reportedly came after a suggestion from Trump’s close aide, billionaire entrepreneur Elon Musk. Musk advised the administration to cut down on what he described as unnecessary foreign aid spending. As a result, the Trump administration not only halted these specific grants but also extended its broader suspension of foreign aid, a policy that had been in place since Trump assumed office.

This decision has put numerous US-funded projects in Nepal on hold, including the high-profile Millennium Challenge Corporation (MCC) agreement, which has been a source of political contention in Nepal for years. The Nepalese Ministry of Finance confirmed on Tuesday that the MCC project has been suspended for 90 days due to the Trump administration’s aid cuts.

MCC Project in Limbo

The MCC, a $500 million US-funded initiative, was designed to enhance Nepal’s infrastructure, particularly in the energy and transportation sectors. The agreement, signed on September 15, 2017, aimed to construct 300 kilometers of electricity transmission lines and upgrade 77 kilometers of roads. Nepal was expected to contribute an additional $197 million to the project, making it the largest grant Nepal has ever received from any country.

Despite its potential benefits, the MCC has faced significant resistance within Nepal’s political landscape. Leftist parties, along with pro-Chinese factions, have long opposed the agreement, arguing that it aligns Nepal too closely with the United States’ Indo-Pacific strategy. The issue led to intense debates in Nepal’s parliament, eventually culminating in the agreement’s ratification on February 27, 2022, under the leadership of Prime Minister Sher Bahadur Deuba. The ratification was accompanied by a 12-point explanatory declaration aimed at addressing national concerns.

China has openly criticised the MCC, accusing the United States of coercing Nepal into accepting the deal. Chinese officials referred to the grant as a “Pandora’s box,” rather than a “gift,” and have warned that it could compromise Nepal’s sovereignty. The New York Times reported that US diplomat Donald Lu had earlier cautioned Nepal that failure to ratify the agreement would be perceived as Chinese interference, which could lead to a re-evaluation of US-Nepal relations.

Geopolitical Ramifications

Trump’s decision to suspend the MCC project and cut foreign aid to Nepal comes amid broader efforts by his administration to reduce overseas spending. In the United States, the Trump administration has shut down multiple USAID programs, citing financial constraints and inefficiency. The move has had a direct impact on Nepal, a country that has historically depended on American aid for development projects, including post-earthquake reconstruction efforts following the 2015 disaster.

Nepal’s reliance on foreign aid has made the MCC saga a highly contentious issue, not only domestically but also geopolitically. China’s influence in Nepal has grown significantly in recent years, with the Communist Party of China (CPC) taking a keen interest in Nepal’s political decisions regarding US grants. Chinese officials reportedly lobbied Nepal’s Communist Party leaders to reject the MCC, underscoring Beijing’s broader regional strategy to counter US influence in South Asia.

While the suspension of the MCC project is currently limited to 90 days, there is growing uncertainty about its future. Analysts believe that Trump’s foreign aid policies could have long-term consequences for Nepal’s development agenda, potentially delaying crucial infrastructure projects and straining Nepal-US relations.

For now, Nepal finds itself caught between two global powers, with the fate of US-backed initiatives hanging in the balance.