As the US decided to shutter the Millennium Challenge Corporation (MCC) grant program, Nepal appears determined to implement the associated infrastructure projects through its own resources. Internal discussions at the Ministry of Finance have concluded that halting the projects midway would not be in the country's interest, given the substantial funds already invested and the strategic significance of the initiatives.

While the US has yet to issue a formal notice regarding the closure of MCC programs to any participating country, including Nepal, media reports from around the world suggest the MCC staff have reportedly been informed that the program may be discontinued at any time. The uncertainty stems from shifts in American foreign aid policy since US President Donald Trump took office on January 20.

Nepal’s Ministry of Finance has begun preparing for the transition, with the finance minister reportedly committed to allocating funds in the upcoming budget to sustain the ongoing work. The government’s position is driven by the need to continue vital infrastructure development, especially in electricity transmission and road upgrades, even in the absence of foreign assistance.

Funding challenges ahead

Continuing the MCC projects without US support poses a serious fiscal challenge. The total estimated cost stands at Rs 92 billion, and allocating even a portion of this from the national budget is expected to be difficult given the current financial strain. Nepal is facing a budget deficit exceeding Rs 125 billion, with revenue collection falling short and foreign aid inflow far below the initial targets - only 28 percent of the foreign grant income realized in the current fiscal year.

Moreover, as Nepal advances toward middle-income status, the volume of external assistance is expected to shrink further. Servicing foreign loans has also become more expensive due to the rising value of the US dollar, increasing the burden of both principal and interest repayments.

Under these circumstances, the Finance Ministry is revisiting its development priorities. Multi-year infrastructure projects are likely to face budget cuts and many ongoing works likely to be scaled down or delayed.

Status of MCC projects

Despite financial headwinds, the MCC projects have already made early progress. Implementation began in September 2023 following parliamentary ratification in 2021. In the road sector, preliminary work has started on the 40-kilometer Dhan Khola–Lamahi section of the East-West Highway. Preparations are underway to extend the work to the Lamahi–Shiva Khola segment, covering an additional 37 kilometers.

In the energy sector, tenders have been issued for the construction of approximately 297 kilometers of power transmission lines, along with an 18-kilometer cross-border connection already under agreement. In total, 315 kilometers of transmission lines are planned, with 856 towers and three 400 kV substations under construction in Ratmate (Nuwakot), New Damauli (Tanahun), and New Butwal (Rupandehi).

Nepal had initially agreed to contribute $197 million to complement the $550 million U.S. grant under the MCC compact. With the US potentially exiting the partnership, Nepal will now be required to bear the full cost, including administrative expenses, which have drawn scrutiny due to the use of luxury facilities and high operational overheads.

Despite the financial burden, officials maintain that continuing the projects is crucial for national development and economic self-reliance. The Ministry of Finance is expected to include budgetary provisions for the projects in the upcoming fiscal plan.