Nepal Can Legally Claim Compensation if U.S. Permanently Cancels $550 Million MCC Grant, Economists Say

If the United States permanently cancels the $550 million Millennium Challenge Corporation (MCC) grant, Nepal has legal grounds to seek compensation for project liabilities, according to Nepali economists and policy experts. The suspension of the MCC grant, which was initially ratified by Nepal’s Parliament and approved by the U.S. Congress, has raised concerns about its potential impact on Nepal’s economic development and ongoing infrastructure projects.

U.S. President Donald Trump’s Executive Order has led to a 90-day hold on $550 million in Millennium Challenge Corporation (MCC) funding for Nepal as part of a broader review of foreign aid policies, impacting crucial infrastructure and energy projects under the Millennium Challenge Account (MCA) Nepal. Trump has emphasized cutting back on international assistance that does not align with American strategic interests. His administration has been reassessing aid programs to eliminate what it sees as inefficiencies, unnecessary spending, and funding for nations perceived as not contributing to U.S. priorities.

Despite the temporary suspension, economists argue that the MCC agreement contains provisions that prevent unilateral termination without due process. Ramshwor Khanal, chairman of Nepal’s High-Level Economic Reform Commission, stated in an interview with Kantipur that if the U.S. permanently cancels the grant, Nepal can legally claim compensation for financial liabilities arising from the sudden halt of the project. Since contracts have already been awarded and initial groundwork has begun, Nepal could demand restitution under international legal frameworks to cover the costs incurred due to the abrupt funding withdrawal.

“The agreement stipulates that neither party can unilaterally revoke the deal without proper notification and due diligence. If the U.S. halts the MCC program permanently, Nepal has a strong legal case to seek damages,” Khanal explained. Khanal is a former Finance Secretary of the Nepal government and was appointed as an economic advisor to then-Prime Minister Dr. Baburam Bhattarai.

The MCC project was primarily focused on upgrading Nepal’s energy transmission infrastructure and road networks, aiming to enhance economic growth and regional connectivity. The Nepal government had already allocated $68 million for MCC-related projects in the current fiscal year, as Nepal is investing a total of $197 million in this project. If U.S. funding is completely withdrawn, the government will need to explore alternative financing options to complete the ongoing projects.

Experts suggest that while the MCC suspension is concerning, Nepal should prepare for multiple scenarios. If the U.S. reinstates the funding after the 90-day review, the project may proceed as planned. However, if the grant is terminated, Nepal must be ready to either claim legal compensation or mobilize alternative funding sources to prevent project delays.

The U.S. foreign aid agency, the Millennium Challenge Corporation (MCC), had recently increased the funding for Nepal’s compact from $500 million to $550 million. The additional $50 million was allocated to the Electricity Transmission Project under the compact. According to the MCC, this additional funding was intended to help cover rising project costs and ensure successful implementation.

Originally signed in 2017, Nepal’s MCC compact had an initial budget of $500 million, primarily focused on electricity transmission and road maintenance projects. These initiatives were expected to strengthen Nepal’s power grid, enhance hydropower utilization, and improve the quality of major road networks. The compact officially entered into force on August 30, 2023, but rising costs necessitated additional funding.

Recently, the U.S. Department of Government Efficiency (DOGE) also announced the cancellation of various foreign aid programs, including two initiatives in Nepal: a $20 million program for “fiscal federalism” and a $19 million project for “biodiversity conservation.”

Nepal and USAID last signed a five-year strategic partnership agreement worth $659 million on May 15, 2022. However, following Trump’s executive order, USAID notified the Ministry of Finance, non-governmental organizations, and nonprofit entities that all grant-funded programs were to be halted immediately.

In 2023, the U.S. provided $68 billion in aid to 176 countries, with Nepal ranking 16th among the recipients. The suspension of U.S. grants raises concerns about the future of Nepal’s externally funded development projects.