In February 2022, while interning with the U.S. Department of State’s Office of South and Central Asian Affairs, I witnessed a long-awaited breakthrough in U.S.–Nepal relations. After five years of political gridlock, Nepal’s Parliament ratified its agreement with the Millennium Challenge Corporation (MCC), a U.S. foreign aid agency. This milestone was the result of sustained efforts across the U.S. government, including the tireless work of several of my colleagues at the State Department. The agreement marked a significant step forward in advancing U.S. development goals in Nepal.
The MCC, central to this achievement, was established in 2004 with broad bipartisan support. It provides large-scale grants to fund infrastructure and development projects in low-income countries. The agreement with Nepal committed $500 million over five years to improve the country’s electricity grid and road networks. For a nation long burdened by poverty and economic instability, the agreement offered a rare and transformative opportunity.
That opportunity, however, was nearly derailed.
Originally signed in 2017, the MCC agreement faced years of delays as a disinformation campaign led by China, Nepal’s northern neighbor and a counterweight to U.S. influence in the region, sought to discredit the deal and push Nepal’s Parliament into gridlock. When the agreement was finally ratified in 2022, it marked a strategic win for Washington and a notable setback for Beijing.
Yet, in foreign policy, even strategic wins can unravel quickly.
By early 2025, the dynamics had shifted dramatically. In January, President Donald Trump signed an executive order titled “Reevaluating and Realigning United States Foreign Aid,” halting all foreign aid programs pending a comprehensive review. The sudden freeze sent shockwaves throughout Nepal, where ongoing MCC work was abruptly paused. By late March, however, the MCC announced that some critical components of the project would continue, following its request for waivers from the U.S. government.
Now, more uncertainty looms. In late April, news broke that the Department of Government Efficiency (DOGE), led by billionaire Elon Musk, plans to dismantle the MCC entirely.
What once represented a transformative opportunity for Nepal’s economy and a landmark achievement in U.S. foreign policy now hangs in limbo. Meanwhile, what was initially a setback for China risks turning into a geopolitical victory for Beijing.
Nepal, the MCC, and Its Significance
Nepal is a small, landlocked country in South Asia, nestled between two regional powerhouses: China to its north and India to its south. In 2024, Nepal’s GDP stood at just $43 billion, with a GDP per capita of $1,390, the second lowest in South Asia, only ahead of Afghanistan.
Given Nepal’s economic challenges, the MCC compact represented a significant opportunity. The $500 million grant was allocated to two key initiatives: the Electricity Transmission Project and the Road Maintenance Project.
The Electricity Transmission project aimed to increase the reliability of Nepal’s power supply while enabling cross-border electricity trade with India. This included constructing approximately 300 kilometers (186 miles) of high-voltage power lines, building substations, and providing technical assistance.
Nepal has long faced chronic electricity shortages. Having lived in the country for several years, I experienced firsthand the regular power outages, known as “load-shedding”, that often left parts of the country without power for 10 to 18 hours a day. While the situation has improved since 2018, Nepal’s energy future still depends on projects like the MCC compact.
The Road Maintenance Project, on the other hand, focused on preserving Nepal’s major national highways through periodic maintenance, technical support, and the introduction of new pavement recycling technology. Anyone who has traveled on Nepal’s roads can attest to how urgently this improvement is needed.
As of early 2025, the MCC's website reports that $43 million of the $500 million grant has already been expended, with an additional $150 million committed.
However, with the MCC facing dissolution, the future of the compact, along with the progress it promised, has been thrown into uncertainty.
A Chinese Challenge
Amid this uncertainty, a familiar player has emerged: China. Numerous news outlets have reported that Beijing is moving to replace U.S. foreign aid projects around the world, and Nepal could be next. The Annapurna Express, a prominent Nepali media outlet, recently reported that leaders from Nepal’s major communist parties have already received informal assurances that China is prepared to step in and support any projects the United States abandons.
So, what would Chinese leadership on future infrastructure projects mean for Nepal? The warning signs are clear: substandard construction, inflated costs, minimal transparency, and rising debt burdens. These risks are not hypothetical. They have already materialized in several Chinese-financed projects across Nepal, where opaque contract terms and weak oversight have left the country exposed to serious financial and operational vulnerabilities.
Just last month, the Nepali government released a 36-page report on Pokhara International Airport, a key infrastructure project in central Nepal constructed by China CAMC Engineering. Inaugurated in 2023, the airport was touted by Beijing as a flagship project under the Belt and Road Initiative. The Chinese ambassador to Nepal, Chen Song, even hailed it as “embodying the quality of Chinese engineering.” Yet, the Nepali government report concluded that the airport was constructed with low-quality materials, failed to meet the agreed-upon standards, and that the contractor had neglected to pay taxes. As a result, Nepal is now left with a flawed $210 million airport, entirely funded by loans.
The Cost of Retreat
When Nepal ratified the MCC compact in 2022, China responded with sharp warnings, urging the country to reconsider its decision. At the time, these warnings seemed like routine geopolitical maneuvering. However, amid sweeping cuts to U.S. foreign aid and the potential dismantling of the MCC, they now carry a more ominous weight.
President Donald Trump has repeatedly vowed to confront China’s global rise. Yet, by dismantling the very tools of soft power that have long set the U.S. apart, chief among them, foreign aid, the administration is playing directly into Beijing’s hands, ceding vital ground that America has long held.
For decades, the United States has been a pillar of global reliability, its influence grounded not only in military strength, but in long-term development partnerships and a shared vision of progress. That legacy is now at risk.
The Nepali lawmakers who took political risks to ratify the MCC compact have been left exposed, and the Nepali people, who have been counting on better roads, reliable electricity and a more hopeful future, are now left staring into uncertainty.
To walk away now would not only erode U.S. credibility in Nepal, but also signal to the region that American commitments are conditional and short-lived. Washington must make clear that its promises still mean something by standing firm behind the MCC and the values it represents.
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The views expressed in this piece are those of the author and do not necessarily represent the position of the Alliance for American Leadership (A4AL).
