Nepal's US-backed infra plan in jeopardy as Trump freezes foreign aid

The $500 million grant was earmarked for critical infra projects, including a 320 km electricity transmission line to facilitate energy exports to India and improvements to Nepal's road network

Nepal’s ambitious infrastructure expansion, backed by a $500 million grant from the United States, has been cast into uncertainty following the Trump administration’s decision to suspend foreign aid.

 

The move, which comes as part of a broader freeze on international funding, has sparked concerns in Kathmandu, where leaders fear the setback could strengthen China’s influence in the region, according to a report by The Economic Times.

 

The funding was provided through the Millennium Challenge Corporation (MCC), a US government agency established in 2004 to promote economic development worldwide. Nepal ratified the deal in 2022 after overcoming significant domestic resistance and agreeing to contribute $200 million of its own resources. The grant was earmarked for critical infrastructure projects, including a 320-kilometre (nearly 200-mile) electricity transmission line to facilitate energy exports to India, as well as improvements to Nepal’s road network.

 

 

However, with Washington halting aid disbursement for at least 90 days, Nepal’s long-term plans are now in limbo. Some preliminary work, such as substation construction, had already commenced, but a prolonged funding freeze could lead to financial and contractual complications for the Himalayan nation.

 

US fund freeze may be advantageous for China

While Beijing has not made any direct moves in response, the situation provides an opportunity for China to further extend its influence in Nepal. Critics of the MCC grant had long warned that accepting US assistance could compromise Nepal’s sovereignty, fuelling speculation that it might pave the way for future American military involvement. The Chinese government also voiced concerns, with Foreign Ministry spokesperson Hua Chunying questioning whether the agreement was a genuine gift or a ‘Pandora’s box’ that could bring unintended consequences.

 

Nepal, which has historically maintained a delicate balance between its two giant neighbours, had already faced Chinese pressure over the MCC deal. Nonetheless, supporters argued that the US grant was a rare opportunity to secure large-scale funding without the debt burdens often associated with Chinese loans. Nepal has already struggled with Beijing-backed projects, such as the Pokhara International Airport, which was built with a $200 million Chinese loan but has failed to generate enough passenger traffic to justify its cost.

 

The US funding suspension also has wider ramifications for Nepal’s energy sector. The transmission line was expected to help Nepal sell surplus hydroelectric power to India, a key component of the country’s economic strategy. Failure to complete the project on time could lead to financial penalties, further straining Nepal’s resources.

 

MCC seeks US waivers

The Millennium Challenge Corporation, meanwhile, is reportedly seeking waivers from the US State Department to continue funding key projects, including Nepal’s. However, whether these efforts will succeed remains uncertain. The agency, with an annual budget of around $1 billion, has long been a tool for US strategic engagement in Asia and Africa, particularly as a counterbalance to China’s Belt and Road Initiative (BRI).

 

With President Trump’s foreign policy taking a sharply inward turn, analysts say Nepal may be forced to reassess its options.