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Shivam Shekhawat, “The MCC Debate and U.S.-Nepal Ties in Flux,” ORF Issue Brief No. 793, April 2025, Observer Research Foundation.
Introduction
On 20 January 2025, United States (US) President Donald J. Trump passed an executive order on “Reevaluating and Realigning United States Foreign Aid”.[1] Declaring that the framework and structure of the US foreign aid industry are not aligned with America’s interests, he called for a reassessment of US foreign assistance programmes and ordered a pause for 90 days. The announcement caused a setback for aid-dependent economies such as Nepal, renewing debates about the sustainability of relying on external actors for bridging the country’s development needs. The immediate impact of the “work-stop” was on funding provided by the US Agency for International Development (USAID), which has extended US$1.5 billion in assistance to Nepal since 1951.[2] In 2022, USAID signed the Development Objective Agreement with Nepal’s Finance Ministry, offering US$695 million to aid Nepal’s transition to a middle-income country.[3]
Even as officials in Nepal were still figuring out how to respond to the spanner on USAID assistance, on 14 February 2025, Kathmandu was informed of the freeze on all payments related to the Millennium Challenge Corporation’s (MCC) Nepal Compact,[4] putting the US$500-million grant also into limbo. In the years prior, the compact—signed in September 2017, ratified by the Nepal Parliament in 2022, and entered into force in 2023[5]—has been mired in political controversy. Kathmandu’s initiation under the programme made it the only South Asian country to join the compact; the US had discontinued its US$480-million partnership on the MCC with Sri Lanka in 2020, a year after it was approved, citing lack of “partner country engagement”.[6]
The US’s and Nepal’s signing of the compact[a] was heralded as a “new chapter”[7] in their relationship. For Washington, South Asia had emerged as a node in the competition between the US and China and their attempts to counter each other’s influence. For Nepal, Washington’s increasing attention over the previous few years was an opportunity to diversify its relations and leverage economic opportunities.[8] However, the Himalayan nation’s close relationships with both China and India complicate its external engagements. Its location, straddled between India and China, has made Nepal an arena for competition between the two neighbours. Nepal’s strategic value to both countries is hinged on its position as the entry point for the Himalayan barrier.[9] Any involvement by an external country generally leads to debates, discussions, and protests against the motivations behind the engagement. With the return of the Trump administration and the temporary work-stop on US aid and grants, Nepal will have to contend with more difficult questions in the coming days.
This brief looks into Washington’s interests in Nepal, the drivers of and opposition to the MCC, and how Nepal’s decision to engage with the US will affect its relationship with its neighbours.
Nepal in US Foreign Policy Objectives
In 1947, the US became the second country, after the United Kingdom (UK), to recognise Nepal as an independent country and the first to offer it development assistance. Washington’s objectives in the 1950s were both strategic and politico-economic, aimed at ensuring Kathmandu’s independence and neutrality and preventing the spread of communism[10] amid its Cold War with the Soviet Union and deteriorating ties with India.[11] While Nepal chose to follow a policy of isolation before Indian independence,[12] the occupation of Tibet by China in 1950 prompted the Rana regime to begin viewing the US as a bulwark against the Chinese threat.
Some Nepalese scholars observe that there was an active attempt by the US to prod Nepal to adopt a more “western orientation”.[13] The State Department saw the formation of a ‘non-Communist’ government and its orientation towards Washington as opposed to Soviet Russia as a fundamental objective of their policy in Nepal during the Cold War.[14] The US offered arms assistance to Nepal—with total military assistance reaching US$1.8 million between 1965-66—and aided the Khampa rebels.[b],[15] One tool that Washington adopted for pivoting Nepal towards the West was economic development. The signing of the Point Four General Agreement for Technical Cooperation on 23 January 1951[c] introduced Nepal to US development assistance, making the US the first country to formally establish an economic assistance programme in Nepal.[16] Aid began in 1951-52 with US$0.2 million and reached US$7.4 billion in 1961-62.[17] As per the US Foreign Assistance database, the amount of funding directed to Nepal across all funding agencies increased from US$51.01 million in 2001 to US$696.2 million in 2023.[18] Its rank across all recipient countries in the region also rose from eighth in 2001 to third in 2024.[19] This aid is concentrated in sectors like agriculture, maternal and child health, government and civil society, disaster prevention, basic education, and energy.[20]
The disbursal of aid by the US was contingent on the political situation in Nepal.[21] Washington’s attention dissipated following improvement in US-China relations, the recognition of the People’s Republic of China (PRC) in 1979, and the end of the Cold War. Despite the shift, similar concerns drive Washington’s foreign policy today, owing to the changes in both Nepal’s own political structure and the world order. In the 2019 Indo-Pacific Strategy Report released by the US Department of Defense, the US described Nepal as an “emerging partner”, emphasising the growing defence partnership between the two countries.[22] That relationship is hinged on humanitarian assistance, disaster response, peacekeeping, professionalisation of the defence sector, and counterterrorism cooperation.[23] The US has continued to extend its support to Tibetan exiles in Nepal, supporting the issuance of identity cards to Tibetan refugees, enacting the Tibetan Policy Support Act in 2022, and advocating for Nepal to enable exiles to go to India. The US also sets aside US$6 million annually for the welfare of Tibetan exiles.[24]
However, there is scepticism within Nepal about what the growing US interest indicates. Despite progress in their defence relations, Kathmandu’s decision to exit the State Partnership Programme (SPP)[d] reflects the complex dynamics in the region. While the stated purpose of the programme was “humanitarian and disaster management”, the signing was shelved due to protests by the communist parties in Nepal, who likened the agreement to joining a security alliance with the US—a narrative that was also extended by China.[25] According to author Amish Mulmi, news about the SPP gained more traction in the context of developments in the bilateral relationship, notably the signing of the MCC, Nepal’s vote against Russia in the United Nations Security Council (UNSC), the visit by the US Deputy Secretary to Tibetan refugee camps, and the visit by a commanding general of the US army.[26]
Nepal’s Initiation into the MCC
The MCC was formed in 2004 against the backdrop of the 9/11 attacks.[27] It is seen as a separate agency from other state department funds and USAID, an alternative outlet to provide funding to countries that show economic and democratic progress to improve their economies and usher in private-sector investment.[28] Unlike other programmes in which Washington’s strategic and security interests influence its decision to support a certain country, under the MCC, according to the US, the decision is based on the recipient country’s overall performance in 20 measurable indicators.[e] Their performance in these indicators determines which grant the countries are eligible for. The programme has three types of grants:
The grants are time-bound, have no repayment conditions, and have stated objectives like economic development, poverty reduction, building the resilience of institutions, market expansion, capacity building, creation of new jobs, and infrastructure development.[29]
Nepal first applied for the MCC in 2012 and was selected for a threshold programme. It was co-opted under the compact grant in 2014.[30] As per the terms of the programme, in addition to US$500 million to be provided by the MCC, the Nepalese government was expected to spend US$130 million, which was later increased to US$197 million—the highest commitment to date by any country in the compact.[31] The additional US$67 million was committed to the programme after its ratification at the request of the Nepal Electricity Authority.[32] The priority projects were selected after discussions with the private sector, civil society, development partners, and other stakeholders, such as the Government of India. From the US$500 million committed under the grant, almost US$450 million has been earmarked for the implementation of the projects, while the remaining US$50 million is committed to project design and evaluation.[33]
The programme has two components. The selection of both projects, as per the MCC, is based on the requirements listed in the Nepal Energy Master Plan 2017 and 2019.:[34],[35]
The ETP is expected to augment electricity production, reduce load shedding, help meet the domestic power goals of Nepal, and benefit its position in the regional energy market.[38] The programme will focus on increasing the flow of energy from existing plants and establishing new plants to enhance trade with India.
The Millennium Challenge Account (MCA)-Nepal, the nodal agency tasked with overseeing the implementation of the grant, signed the contract for the 18-km cross-border Butwal-Gorakhpur transmission line from the 315-km line in August 2024. The line was expedited to meet the obligations of the trade agreement between India and Nepal[39] as it was significant for cross-border trade.[40] The contract was awarded to Transrail Lighting Ltd, an Indian company, to build the line from the 400 kV New Butwal substation in Nawalparasi-Bardaghat-Susta West to the Nepal-India border within the contract duration of 21 months. The contracts for all three sub-stations have also been signed, all with an Indian company.[41] India and Nepal also signed an MoU at secretary-level talks in February 2025 to discuss the facilitation of two additional 400 kV cross-border transmission lines and conduct feasibility studies to explore more such lines. The target completion year for these lines is set to 2030, and the lines are expected to enable the export of 16,000 MW of electricity by 2035.[42] Nepal will cover 51 percent of the expenses on its side, and the Power Grid Corporation of India will cover 51 percent of expenses on the Indian side.[43]
In October 2023, the bidding process was cancelled because of very high bids (66 percent higher than the targets).[44] The bid for the remaining 297 km of the line was relaunched in November 2024, the deadline for which was 30 January 2025.[45] However, with the cessation of the grant, there is uncertainty about whether the tendering process will continue. For the road maintenance projects, initial examination reports for some segments on the East-West highway have been approved.[46] The Department of Roads has also been offered upgraded laboratories, technical training, and testing equipment.[47] However, challenges persist in terms of issues related to land acquisition, demands for higher compensation, determining the rates of compensation, cutting trees, and the demands of local governments, which further complicate the process.[48]
Apprehensions and Expectations
Within Nepal, there were two predominant narratives in the debate around the ratification of the MCC: that Kathmandu should advance its economic progress through this grant and that it should be wary of US attempts to increase its presence in the country and pose a counter to China. The latter view emerged with doubts about Nepal’s inclusion in the US’s Indo-Pacific Strategy, which were subsequently leveraged by communist parties in Nepal to protest against the programme.
The ratification process became a testing field for all political parties. In 2019, the Visiting Acting Deputy Assistant Secretary for South Asia at the US Department of State, David J. Ranz, clubbed the MCC compact programme as an important initiative under the US Indo-Pacific strategy—[49] a stance reiterated by other US officials. It subsequently became a political issue. The Standing Committee meeting of the now-defunct Nepal Communist Party (NCP) in 2020 reflected differences between leaders; additionally, there were calls for modifications in the compact agreement, with some considering it to be a military alliance.[50] They also viewed the debate surrounding the MCC as a “long-term strategic issue”, in the context of overall US engagement in the country.[51]
Pushpa Kumar Dahal was one of the key leaders who questioned the ratification. After the NCP was dismantled in 2021, Dahal used the MCC as a political weapon against then Prime Minister K.P. Oli, but ultimately became part of a government that supported the MCC.[52] When in power, the Communist Party of Nepal-Unified Marxist Leninist (CPN-UML) was in favour of the ratification process, whereas the CPN (Unified Socialist) was committed to not approving any agreement that went against national interests. While Oli warned that the coalition would discontinue in the absence of any vote, Dahal urged his party members to not sign the compact in its current form.[53]
In 2021, the then-Nepali Minister of Finance submitted a list of 11 questions asking the US for more information about the nature of the grants. A 13-page clarification and a visit by the Vice President of the MCC to Nepal followed to dispel concerns. The questions and the responses from the US are presented in Table 1.
Table 1: Nepal’s Concerns About MCC and US Response
| Questions from Nepal | US Responses |
| Nature of the grant: Quid pro quo or no conditions attached? | No quid pro quo. Repayment is to be done only when there has been a misuse of funds that violates the compact terms. |
| Country selection: Based on the criteria or considered important from the perspective of US military strategy in the region? | US law prohibits funding to be used for military purposes. Nepal was selected based on its strong performance in the MCC scorecard. |
| Is the agreement based on Nepal’s needs and requirements? | All projects are selected by the Government of Nepal (GoN) with the private sector and civil society. The transmission lines are mentioned in Nepal’s 2015 and 2017 Transmission Plans. |
| Is the decision to classify it as an “international agreement” aimed at subverting Nepal’s constitution and laws? Will it affect Nepal’s sovereignty? | All MCC compacts are international agreements. The implementation will happen based on Nepal’s laws, except for situations where a specific provision falls into conflict with a specific law. That will then see mutually agreed-upon terms under the compact and the constitution of Nepal. Nepal’s Ministry of Law, Justice and Parliamentary Affairs (MoLJPA) ruled that the compact does not go against any domestic laws. |
| Was parliamentary ratification done to give the MCC statutory powers and exercise control? | MoLJPA advised that, as per Nepal’s law, the compact will need to be ratified by the Parliament to become an international agreement. |
| Is the provision for the exemption of parliamentary approval for parts of the agreement or amendments aimed at allowing changes to further US strategic interests? Can the compact be modified? | Modifications are needed to respond to the changing political and social realities of the country. The compact mentions that they are not ‘amendments’; thus, they do not need ratification. Amendments only impact the main body. No, it cannot be modified. |
| Is the MCC a part of the Indo-Pacific Strategy (IPS)? The formation of the MCC predated the IPS; therefore, how can the former be subsumed under the latter? | No, it is not a part of the IPS. Nepal’s decision to become a part of the IPS is independent and separate from the compact. MCC is not an agreement under the IPS and is also not a part of US military strategy. |
| Why were the agreements that were signed after the compact not made public, particularly the implementation agreement? | The compact is the primary document that governs the grant. The Program Implementation Agreement is public and available. |
| Why is the MCC staff exempt from being prosecuted under local laws, and why are they exempted from paying taxes? | The grant amount should only be used in the project work. The immunity granted to the staff is only standard diplomatic immunity. |
| Will Nepal have no intellectual property rights on the projects? | GoN owns all intellectual property created under the program. |
| Submitting all original records and documents to the MCC is against the country’s security system and privacy as well as being embarrassing for the workers. | It is done to ensure that the best standards are kept and there is no misuse of funds. |
| Why has Nepal’s Auditor General been overlooked for the auditing, and why are US-certified firms in charge? | The Auditor General of Nepal can conduct the audits. |
| What if the US decides to terminate the compact on its own? Will it not impose undue fiscal pressure on Nepal and undermine its sovereignty? Who will determine that there has been a violation of the agreement? If Nepal signs an agreement with a country with which the US does not have a good relationship, will that be seen as a violation? | Suspension only occurs if there has been significant political upheaval in the country. Both sides can suspend based on the facts of the compact and the findings of independent third parties. The provision only applies to the compact and not Nepal’s relationship with other countries. |
| What is the actual timeframe for the completion of the MCC? What will happen after that? | Post the completion of the five-year implementation period, MCC will have no physical presence in the country but will work with the GoN to evaluate progress. 120 days after compact completion will be allotted for administrative closure of the program. |
| In the event of inconsistencies between the compact and other agreements, the compact will prevail. This appears to be a pressure tactic to not permit agreements with China, particularly the Belt and Road Initiative. | No, it does not affect Nepal’s agreements with other countries. |
| The land acquired will be through the GoN’s matching funds. Who will have ownership over that? | The GoN or entities of the GoN will have ownership over the lands. |
Source: Kathmandu Post[54]
Following this, in a letter dated 29 September 2021, then Prime Minister Sher Bahadur Deuba and leader of CPN (MC) Dahal requested the Chairman of the MCC for an additional five to six months to garner the necessary consensus for the ratification.[55] They outlined five ways through which they would gather the parliamentary consensus: discuss the clarifications received by the MCC with the coalition partners; utilise the Nepalese government’s resources to convey the benefits of the programme; hold a joint press conference; disseminate accurate information through state media; and jointly request the speaker of the house to table it in the House of Representatives. The receipt of the letter was also confirmed by then CEO of the MCC, Mahmoud Bah.[56]
The MCC Board of Directors responded to the letter in December 2021, reminding Nepalese leadership that failure to ratify the compact by 28 February 2022 would have serious repercussions vis-à-vis US engagement in the country.[57] In February 2022, US Assistant Secretary of State for South Asia, Donald Lu, again urged Nepal to ratify the MCC or risk a review of the overall bilateral relationship.[58] The US reiterated that the compact will undergo no amendments and that inaction on Kathmandu’s part can lead to cuts in aid and investments and assistance both bilaterally and from multilateral agencies.[59] They also highlighted the disinformation campaign against the US and how, after multiple instances of denying any defence or security element related to MCC, they were still amplified in the country.[60] The outrage on the issue also made it incumbent on the US to continue its push for parliamentary ratification. This push from Washington to ratify the compact also raised suspicions about its intentions. For some Nepalese commentators, PM Oli’s insistence on not being seen as the sole promoter of the programme also led to attempts to garner a consensus.
The compact was finally ratified on 27 February 2022 with a 12-point interpretative declaration.[61] It reiterated the questions raised by Nepal, and the letter containing the questions and responses was used in the implementation of the compact. A letter of exchange was signed by both sides.
The Geopolitics of Infrastructure
In February 2023, then US Under Secretary of State for Political Affairs, Victoria Nuland, visited Nepal, reiterating the US commitment to continue with its “multi-dimensional” support to the country.[62] Her discussions with the prime minister and foreign minister, as well as the presidents of other political parties, focused on devising ways of furthering MCC implementation and creating an environment to increase US investments in the country. During her visit, Nuland announced an additional US$1 billion investment in clean energy, electrification, and small businesses in Nepal over the next five years. She emphasised Washington’s policy of accounting for Nepal’s relationship with other countries and indicated that Washington would be willing to work with Nepal’s neighbours.[63] In September 2023, USAID also committed US$2 million in aid to further Nepal’s democratic reform and stabilise the economy,[64] and the two sides inaugurated a bilateral consultation mechanism in October 2024 to review the full gamut of bilateral relations.[65]
Washington’s growing outreach to Nepal is part of its increased activities in South Asia through economic and strategic cooperation, even as it denies any link between the Indo-Pacific Strategy and the MCC.[66] Since the ratification of the programme, the number of visits by officials from the US has increased (see Table 2).
Table 2: Visits to Nepal by US Officials (2022-2024)
| Participants | Brief Description of the Meeting | Dates | |
| Senator Kirsten Gillibrand & Nepal PM Sher Bahadur Deuba | Discussing US-Nepal relations post-MCC ratification | 22 April 2022 | |
| 2. | U.S Special Coordinator for Tibetan Issues Uzra Zeya & Nepal PM Sher Bahadur Deuba | Nepal-US relations and matters of mutual interests | 22 May 2022 |
| 3. | General Charles Lynn of the US Army & Nepal Army Generals | Strengthening military cooperation and training support and joining SPP | 9-12 June 2022 |
| 4. | US Assistant Secretary of State for South and Central Asia Donald Lu | Discussions surrounding the MCC compact and its implications for Nepal | July 2022 |
| 5. | US Under Secretary for State and Political Affairs Victoria Nuland & PM Pushpa Kamal Dahal | Engagement with the new government on US-Nepal partnership and regional stability | 29-30 January 2023 |
| 6. | Administrator of USAID Samantha Power | Announcement of a US$58.5 million grant to support democratic progress in Nepal | February 2023 |
| 7. | US Deputy Assistant Secretary of State Afreen Akhter | Focus on economic development and women’s empowerment initiatives in Nepal | 10 February 2023 |
| 8. | Prime Minister Pushpa Kamal Dahal | Attendance at the UN General Assembly and discussions on Sustainable Development Goals | 10-16 September 2023 |
| 9. | US Deputy Secretary of State Richard Verma & Nepal Prime Minister K. P. Sharma Oli | Discussions on various aspects of the bilateral ties, including development cooperation and mutual interests | 16 August 2024 |
| 10. | Assistant United States Trade Representative for South and Central Asia Brendan Lynch & Gobinda Bahadur Karkee | 7th Trade and Investment Framework Agreement (TIFA) Council Meeting | 16 September 2024 |
| 11. | US Assistant Secretary of State for South and Central Asia Donald Lu | Focus on environmental conservation, women’s empowerment, and cultural preservation. | 3-10 December 2024 |
Source: Author’s own, from various sources
Possible reprimands from China were a factor behind Nepalese leaders’ opposition to the grant. In 2020, during the political controversies around the MCC, the Chinese ambassador endorsed the MCC and its ratification and stated that Beijing welcomes any international economic assistance to Nepal.[67] However, the public statement did not indicate that China wanted the US to increase its influence in Nepal. In a February 2023 US House of Representatives Foreign Affairs Committee testimony, US officials blamed the PRC for pressurising Nepal to reject the grant. A report by the Centre for Social Inclusion and Federalism, a Nepal-based think tank, also regarded the protests against the MCC and the SPP as examples of an information disorder in Nepal, fomented with Chinese support.[68]
Chinese opposition was centred around the potential risks posed by the grant to Nepal’s sovereignty, the opening of a “Pandora’s box”, and how Nepal was being forced into signing the agreement and joining a security and military alliance with the US.[69] Chinese diplomats created videos on YouTube and TikTok against the MCC and hired social media influencers. Even before and after the ratification was secured in 2022, Chinese diplomats engaged with Nepalese leaders. When the Dahal-led Left government came into power in December 2022, China wanted them to maintain a hotline on the MCC, Indo-Pacific, and other US-led initiatives. However, the political instability in Nepal prevented such engagement, with the CPN (MC) forming an alliance with the Nepali Congress in February 2023.[70]
With the growing differences between India and China at the regional level and the division between China and the US at the global level, South Asia has become a key geography where these differences have played out. Beijing’s influence in Kathmandu has steadily increased over the last few decades. A few months before the MCC was signed, Kathmandu became a party to the framework agreement of the Belt and Road Initiative (BRI).[71] However, the implementation plan of the BRI has not yet been signed, and none of the projects have been completed.
The challenges related to the implementation of large-scale infrastructure and connectivity projects persist, irrespective of who is in power.[72] The potential political fallout of favouring one country over another is a cause of concern. This is also evident in the concerns that Nepal raised about the compact. Statements by leaders from China and the US that group all outreach to Nepal under a single umbrella can spark grievances about the country’s perceived tilt towards one side.[73] So far, Kathmandu has opposed both Beijing’s categorisation of all projects under the BRI and Washington’s positioning of the MCC under the Indo-Pacific Strategy.[f]
As Beijing expands its influence in the country, Nepal’s strategic space to enact its foreign policy has reduced. Nepal’s stance regarding Beijing’s security concerns has also hardened, particularly on the question of Tibet and the presence of Tibetan exiles in the country.[g][74] The two sides also signed a second framework agreement on the BRI in December 2024, when PM Oli visited China.[75]
These developments highlight the importance of Washington and New Delhi maintaining their influence in Nepal. In Nepal, there is growing consensus that the country should maximise the benefits from its engagements with other countries; for instance, cooperating with the US will allow Kathmandu to overcome the limitations posed by its geographical location.[76] These “extra-regional partnerships” can allow Nepal to meet its development needs while diversifying its relations.[77]
The growing convergence between India and the US can help Kathmandu fulfil its developmental aspirations.[78] While the US-India partnership poses a challenge to China, several elements need to materialise before the partnership can become sustainable.[79] Washington backtracking on its aid commitments leaves many of these joint efforts in limbo. Many senior leaders perceive this development as a breach of trust between Nepal and the US.[80] Even as the MCC announced an additional US$50 million under the grant in December 2024, no payments have been made after 20 January 2025, and work on new projects is on hold.[81] However, according to some officials, the tender process is ongoing.[82] The US embassy in Nepal also expressed confidence in the partnership and was sure that the grant would resume after the review process. The MCC is further complicated because of the fixed timeline of five years. In the absence of funds from the MCC, if Nepal intends to continue with the project, it will have to explore other sources or divert funds from other projects.[83]
Conclusion
For a country already struggling with an over-reliance on aid and is seeking a more sustainable ecosystem, the abrupt cessation of all US aid will raise critical questions about Nepal’s relationship with its partners, namely the US, China, and India. The magnitude of US support cannot be matched by any one country, even as reports emerge about Nepalese officials considering reaching out to Germany, South Korea, Japan, and the UK.
While China can leverage the situation to demonstrate its reliability, it remains uncertain how much tangible involvement Beijing will commit to, given the challenges it has encountered with the BRI. For India, Nepal’s inability to follow through on the construction of the transmission line raises questions about the power trade agreement between the two countries signed in January 2024 and New Delhi’s broader strategy to serve as a conduit for Nepal’s electricity transmission to other countries in the region.
Shivam Shekhawat is Junior Fellow, Neighbourhood Studies, Observer Research Foundation.
The author thanks Mallaika Thapar and Puspa Kumari, former ORF Interns, Strategic Studies Programme, Observer Research Foundation for assisting with the tables and references.
Endnotes
[a] Then Foreign Minister Gyanendra Bahadur Karki and then Acting MCC CEO Jonathan Nash signed the compact in 2017, when Nepal was under the prime ministership of Sher Bahadur Deuba of the Nepali Congress.
[b] The resistance against the Chinese occupation of Tibet in the 1950s began in the eastern region of Tibet, i.e., Kham and Ando. The US provided them training.
[c] After being elected president for the second time in 1949, Henry S. Truman outlined his foreign policy objectives in four points. The Point Four Program was the final objective. It stipulated that the US will now make the benefits of its scientific and industrial progress available to underdeveloped areas for their growth. This heralded the beginning of their economic assistance in Nepal.
[d] The SPP is an exchange programme between an American state’s national guards and a partner foreign country. Nepal requested to join the SPP in 2015 and 2017. US accepted its request in 2019 but due to internal protests and political disagreements, it left the programme in June 2022.
[e] These are: access to credit; child health; civil liberties; corruption; education expenditure; employment; fiscal policy; freedom of information; primary, lower secondary and upper secondary education rates for girls; government effectiveness; health expenditure; immunisation rates; inflation; land rights and access; natural resources; political rights; regulatory quality; rule of law; trade policy; and women’s participation in labour force.
[f] The US Indo-Pacific Strategy outlines the security, economic, and political approach in the Indo-Pacific region to counter growing Chinese intransigence. While the strategy report on the Indo-Pacific released in 2019 by the Department of Defense does not mention the MCC, another report, A Free and Open Indo-Pacific: Advancing a Shared Vision, mentions the MCC with the economic pillar of the Indo-Pacific Strategy. See: https://www.whitehouse.gov/wp-content/uploads/2022/02/U.S.-Indo-Pacific-Strategy.pdf; https://www.state.gov/wp-content/uploads/2019/11/Free-and-Open-Indo-Pacific-4Nov2019.pdf
[g] Since the pro-Tibet protests of 2008, the two sides have shared multiple intelligence sharing agreements. Among other actions, Kathmandu has cracked down on the activities of Tibetan exiles in the country, sent back refugees, and imposed more stringent rules on the acquisition of resident permits.
[1] Executive Order, The White House, https://www.whitehouse.gov/presidential-actions/2025/01/reevaluating-and-realigning-united-states-foreign-aid/
[2] Kishor Pradhan, “How USAID Cut Affects Nepal,” Nepali Times, January 26, 2025, https://nepalitimes.com/news/how-usaid-cut-affects-nepal
[3] Birat Anupam, “How Will US Foreign Aid Freeze Affect Nepal?,” The Diplomat, February 10, 2025, https://thediplomat.com/2025/02/how-will-us-foreign-aid-freeze-affect-nepal/ ; US Embassy in Nepal, https://np.usembassy.gov/news-05052022/#:~:text=This%20Assistance%20Agreement%2C%20which%20will,to%20a%20middle%2Dincome%20country.
[4] Kosh Raj Koirala, “Fate of MCC-Funded Projects Hangs in Balance as US Suspends Funding,” Republica, February 19, 2025, https://www.myrepublica.nagariknetwork.com/news/fate-of-mcc-funded-projects-hangs-in-balance-as-us-suspends-funding-88-84.html
[5] Anil Giri, “MCC Compact’s Entry into Force a Year Old,” The Kathmandu Post, August 31, 2024, https://kathmandupost.com/national/2024/08/31/mcc-compact-s-entry-into-force-a-year-old.
[6] “Sri Lanka Compact,” Millennium Challenge Corporation, https://www.mcc.gov/where-we-work/program/sri-lanka-compact/.
[7] Giri, “MCC Compact’s Entry into Force a Year Old”
[8] Bibek Chand, “Managing Regional Rivalries and Extra-Regional Interests as a Buffer State: The Nepalese Case Study,” Georgetown Journal of International Affairs, January 19, 2024, https://gjia.georgetown.edu/2024/01/19/managing-regional-rivalries-and-extraregional-interests-as-a-buffer-state-the-nepalese-case-study/.
[9] Avasna Pandey, “Nepal: US Indo-Pacific Strategy at One Year,” East West Center, May 21, 2023, https://www.eastwestcenter.org/sites/default/files/2023-05/Nepal - US Indo-Pacific Strategy at One Year.pdf.
[10] Narayan Khadke, "U.S. Aid to Nepal in the Cold War Period: Lessons for the Future,” Pacific Affairs 73, no. 1 (2000): 77–95, http://www.jstor.org/stable/2672285.
[11] Khadke, "U.S. Aid to Nepal in the Cold War Period: Lessons for the Future"
[12] Sebastian von Einsiedel, David M. Malone, and Suman Pradhan, “Nepal in Transition: From People's War to Fragile Peace,” Cambridge University Press, 2012, pp291.
[13] Khadke, "U.S. Aid to Nepal in the Cold War Period: Lessons for the Future"
[14] Office of the Historian, Department of State Policy Statement, https://history.state.gov/historicaldocuments/frus1950v05/d836
[15] Office of the Historian, Memorandum for the Special Group, https://history.state.gov/historicaldocuments/frus1964-68v30/d337; Laxmi Basnyat, “Nepal-China ties: Irritants of the 60s and 70s”, Nepal Live Today, November 12, 2022, https://www.nepallivetoday.com/2022/11/12/nepal-china-ties-irritants-of-the-60s-and-70s/
[16] Pandey, “Nepal: US Indo-Pacific Strategy at One Year”
[17] Khadke, "U.S. Aid to Nepal in the Cold War Period: Lessons for the Future"
[18] U.S. Foreign Assistance, "Nepal: Obligations," 2024, https://foreignassistance.gov/cd/nepal/2024/obligations/0.
[19] U.S. Foreign Assistance, "Nepal: Obligations"
[20] U.S. Foreign Assistance, "Nepal: Obligations"
[21] Aditya Gowdara Shivamurthy, “U.S.-China Competition: Perspectives from South Asia,” Special Report Observer Research Foundation, no. 218, December 2023, https://www.orfonline.org/public/uploads/posts/pdf/20240105170414.pdf.
[22] White House, U.S. Indo-Pacific Strategy, February 2022, https://www.whitehouse.gov/wp-content/uploads/2022/02/U.S.-Indo-Pacific-Strategy.pdf.
[23] US Department of Defense, Indo-Pacific Strategy Report: Preparedness, Partnerships, and Promoting a Networked Region, June 2019, https://media.defense.gov/2019/jul/01/2002152311/-1/-1/1/department-of-defense-indo-pacific-strategy-report-2019.pdf.
[24] “U.S.-China Competition: Perspectives from South Asia”
[25] “Foreign Ministry Spokesperson’s Regular Press Conference on June 23, 2022,”Ministry of Foreign Affairs, China, https://www.mfa.gov.cn/eng/xw/fyrbt/lxjzh/202405/t20240530_11347309.html.
[26] “U.S.-China Competition: Perspectives from South Asia”
[27] Lael Brainard, “The Millennium Challenge Account and Foreign Assistance: Transformation or More Confusion,” Brookings, March 1, 2023, https://www.brookings.edu/articles/the-millennium-challenge-account-and-foreign-assistance-transformation-or-more-confusion/.
[28] “Millennium Challenge Corporation, USA,” https://www.mcc.gov/about/.
[29] “Millennium Challenge Corporation, USA”
[30] “Millennium Challenge Corporation, USA”
[31] "Nepal Compact,” Millennium Challenge Corporation, USA, https://www.mcc.gov/where-we-work/program/nepal-compact/.
[32] Prithvi Man Shrestha, “What Does the MCC Nepal Compact’s Imminent Entry Into Force Entail?,” The Kathmandu Post, August 27, 2023, https://kathmandupost.com/national/2023/08/27/what-does-the-mcc-nepal-compact-s-imminent-entry-into-force-entail.
[33] Shrestha, “What Does the MCC Nepal Compact’s Imminent Entry Into Force Entail?”
[34] “Transmission System Master Plan Sheds Light on Power Ambitions,” The Kathmandu Post, July 2, 2018, https://kathmandupost.com/money/2018/07/02/transmission-system-master-plan-sheds-light-on-power-ambitions
[35] Millennium Challenge Corporation, Millennium Challenge Compact, https://assets.mcc.gov/content/uploads/compact-nepal.pdf
[36] Millennium Challenge Corporation, Millennium Challenge Compact
[37] Millennium Challenge Corporation, Millennium Challenge Compact
[38] MCA Nepal Author, “MCA-Nepal Signs Contract For 18 Km Cross Border Transmission Line,” Millennium Challenge Account-Nepal, August 30, 2024, https://mcanp.org/en/Content/IndividualData/News/20664
[39] MCA Nepal Author, “MCA-Nepal Launches 18 Km Cross-Border Transmission Line,” Millennium Challenge Account-Nepal, January 6, 2024, https://mcanp.org/en/Content/IndividualData/ElectricityTransmissionProject/20867 .
[40] MCA Nepal Author, “MCA-Nepal Launches 18 Km Cross-Border Transmission Line”
[41] “Millennium Challenge Account - Nepal Signs All Three 400kV Substation Contracts,” The Kathmandu Post, July 31, 2024, https://kathmandupost.com/national/2024/07/31/millennium-challenge-account-nepal-signs-all-three-400kv-substations.
[42] Millennium Challenge Account - Nepal Signs All Three 400kV Substation Contracts”
[43] Anil Giri, “Nepal, India Endorse Investment Plan For Two 400 kV Transmission Lines,” The Kathmandu Post, February 13, 2025,
[44] Prithvi Man Shrestha, “Cost-Cutting Measures to be Taken to Build Transmission Lines Under MCC,” The Kathmandu Post, January 24, 2024, https://kathmandupost.com/national/2024/01/24/standards-could-be-weakened-to-manage-cost-to-build-transmission-lines-under-mcc.
[45] “MCA-Nepal Relaunches 297-Km Transmission Line Bid,” The Kathmandu Post, November 27, 2024, https://kathmandupost.com/national/2024/11/27/mca-nepal-relaunches-297-km-transmission-line-bid
[46] Giri, “MCC Compact’s Entry into Force a Year Old”
[47] Millennium Challenge Account-Nepal, Progress Report 2023-2024, https://mcanp.org/assets/mcanp/pdf/OneYearOn_EN.pdf
[48] MCA Nepal Author, “Second Phase of Consultations with CFUGs and LFUGs,” Millennium Challenge Account- Nepal, January 6, 2025, https://mcanp.org/en/Content/IndividualData/ElectricityTransmissionProject/20874.
[49] Anil Giri, “Indo-Pacific Strategy is Not Against Any Country, Visiting US Official Asserts,” The Kathmandu Post, May 15, 2019, https://kathmandupost.com/valley/2019/05/15/indo-pacific-strategy-is-not-against-any-country-visiting-us-official-asserts.
[50] Binod Ghimire, “China Says it Welcomes Any Foreign Economic Support - Even the MCC - to Nepal,” The Kathmandu Post, January 3, 2020, https://kathmandupost.com/national/2020/01/03/china-says-it-welcomes-any-foreign-economic-support-even-the-mcc-to-nepal.
[51] Rishi Gupta, “Nepal’s Geopolitical Crossroads: Balancing China, India, and the United States,” Asia Society Policy Institute, September 20, 2023, https://asiasociety.org/policy-institute/nepals-geopolitical-crossroads-balancing-china-india-and-united-states.
[52] Jagdishor Pandey, “Fatema Z Sumar: We are Looking for the Compact to be Ratified by February 28,” The Kathmandu Post, February 6, 2022, https://kathmandupost.com/national/2022/02/06/top-mcc-official-hints-nepal-may-lose-eligibility-to-receive-500-million-if-ratification-fails.
[53] Binod Ghimire, “Dahal’s Mendacity, Double-Dealing and Subterfuge,” The Kathmandu Post, February 7, 2022, https://kathmandupost.com/politics/2022/02/07/dahal-s-mendacity-doubling-dealing-and-subterfuge.
[54] Prithvi Man Shreshtha and Anil Giri, “MCC Responds to Nepal’s Concerns Ahead of its Top Official’s Arrival,” The Kathmandu Post, September 8, 2021, https://kathmandupost.com/national/2021/09/08/mcc-responds-to-nepal-s-concerns-ahead-of-its-vice-president-s-visit
[55] Pandey, “Fatema Z Sumar: ‘We are Looking for the Compact to be Ratified by February 28”
[56] Pandey, “Fatema Z Sumar: ‘We are Looking for the Compact to be Ratified by February 28”
[58] Anil Giri, “Top American Official Says US will Review Nepal Ties if MCC Compact is not Ratified,” The Kathmandu Post, February 11, 2022, https://kathmandupost.com/national/2022/02/10/top-american-official-says-us-will-review-nepal-ties-if-mcc-compact-is-not-ratified.
[59] Giri, “Top American Official Says US will Review Nepal Ties if MCC Compact is not Ratified”
[60] Prashant Jha, “US Believes China Behind Delay of $500m Grant Project in Nepal,” Hindustan Times, February 14, 2022, https://www.hindustantimes.com/world-news/us-believes-china-behind-delay-of-500m-grant-project-in-nepal-101644830409010.html
[61] “What's in 12-Point Interpretative Declaration on MCC?,” Setopati, February 27, 2022, https://en.setopati.com/political/158036
[62] “US Under-Secretary Nuland Shows Keen Interest in Implementing MCC,” New Biz Report, New Business Age, January 30, 2023, https://www.newbusinessage.com/article/us-under-secretary-nuland-shows-keen-interest-in-implementing-mcc
[63] Kaushal Ghimire, “US Will Invest Over $1 billion in Nepal in Next Five Year: Under Secretary Nuland,” Audio Report, Radio Nepal Online, January 30, 2023, https://radionepalonline.com/en/2023/01/30/345322.html.
[64] “USAID Pledges $2 million Aid to Nepal”,” The Kathmandu Post, September 22, 2023, https://kathmandupost.com/national/2023/09/21/usaid-pledges-2-million-aid-to-nepal.
[65] “Nepal and US Signs MoU on Bilateral Consultation Mechanism,” The Kathmandu Post, October 1, 2024, https://kathmandupost.com/national/2024/10/01/nepal-and-us-sign-mou-on-bilateral-consultation-mechanism.
[66] Pandey, “Nepal: US Indo-Pacific Strategy at One Year”
[67] Ghimire, “China Says it Welcomes Any Foreign Economic Support - Even the MCC - to Nepal”
[68] Gupta, “Nepal’s Geopolitical Crossroads: Balancing China, India, and the United States”
[69] “U.S.-China Competition: Perspectives from South Asia”
[70] “U.S.-China Competition: Perspectives from South Asia”
[71] Shivam Shekhawat, “BRI in Nepal: An Appraisal,” Issue Brief, Observer Research Foundation, June 10, 2024, https://www.orfonline.org/research/bri-in-nepal-an-appraisal
[72] Dron Lamichhane, “BRI and MCC: Implications for Nepal,” República, April 11, 2022, https://myrepublica.nagariknetwork.com/news/bri-and-mcc-implications-for-nepal/.
[73] Shekhawat, “BRI in Nepal: An Appraisal”
[74] Harsh V Pant and Shivam Shekhawat, “Fast Lane to Kathmandu,” OPEN, December 13, 2024, https://openthemagazine.com/columns/fast-lane-to-kathmandu/
[75] Pant and Shekhawat, “Fast Lane to Kathmandu”
[76] Chand, “Managing Regional Rivalries and Extra Regional Interests as a Buffer State: The Nepalese Case Study”
[77] Chand, “Managing Regional Rivalries and Extra Regional Interests as a Buffer State: The Nepalese Case Study”
[78] Gupta, “Nepal’s Geopolitical Crossroads: Balancing China, India, and the United States”
[79] “U.S.-China Competition: Perspectives from South Asia”
[80] Anupam, “How Will US Foreign Aid Freeze Affect Nepal?”
[81] Anil Giri, “MCC Funds Freeze Sparks Fears of Project Delays,” The Kathmandu Post, February 20, 2025, https://kathmandupost.com/national/2025/02/20/mcc-funds-freeze-sparks-fears-of-project-delays
[82] Giri, “MCC Funds Freeze Sparks Fears of Project Delays”
[83] Giri, “MCC Funds Freeze Sparks Fears of Project Delays”
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Shivam Shekhawat is a Junior Fellow with ORF’s Strategic Studies Programme. Her research focuses primarily on India’s neighbourhood- particularly tracking the security, political and economic ...
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