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View from the Himalayas: US freeze on foreign aid leaves Nepal sectors in limbo

Feb 03, 2025 06:37 PM IST

Long-term US aid freeze and withdrawal from programmes will invite new rivalries in the geopolitical theatre.

A raft of executive orders issued by President Donald Trump in his early days in office has put several programmes across sectors in Nepal in a state of limbo. As of January 29, Trump had signed 44 executive orders.

Nepalese porters walk across the Shey La Pass in Dolpo region of the Himalayas. (Getty Images) PREMIUM
Nepalese porters walk across the Shey La Pass in Dolpo region of the Himalayas. (Getty Images)

America partners with the Nepal government and local organisations on a wide range of programmes—from boosting food security and economic growth, managing natural resources, improving health care and education and bolstering democratic governance and responding to natural disasters. Nepal has been a major recipient of aid from the US, the largest donor globally. In fiscal year 2023, it disbursed $72 billion worldwide. 

Nepal is understandably concerned over the abrupt suspension of American aid and is awaiting elucidation from US authorities regarding the duration and scope of the funding freeze. Efforts are underway to assess the potential impact on ongoing and planned projects, reported The Kathmandu Post.

Already, some organisations have been forced to lay off their staff while many others are bracing for a protracted suspension. The worst-hit are those which are fully funded by American assistance. But all — regardless of whether they are fully or partially funded — now seem pressured to diversify their resources. A senior member of a civil society organisation working on climate change said his office has laid off some of their Kathmandu-based staff, and the remaining members of the team have agreed to take a 20% pay cut to stay afloat. Efforts were now afoot to diversify aid sources.

But tweaking staffing, managing office logistics and handling ongoing programmes could be formidably tough for some as they wait out the 90-day funding pause. The uncertainty over whether their programmes would be continued after the review, along with the concurrent financial distress and dilemma, is discernible.

The US withdrawal from the Paris Agreement has already rung an alarm bell as programmes focusing on climate resilience and biodiversity conservation, including in the Himalayan region, face new risks. In a relatively small area, Nepal possesses a diverse climatic system, which combines heavy monsoons, steep terrain, and remoteness, rendering it vulnerable to natural disasters. Nepal is at a high risk of floods, including Glacial Lake Outburst Floods (GLOFs), landslides, and droughts. Extreme weather events are likely to make natural disasters more frequent and calamitous. Between September 26 to 28 last year, in 72 hours, Kathmandu received more than 350 millimetres of rain, one-fourth of what it gets in a whole year.

History of US assistance dates back to Cold War

Nepal and America have a long history of development cooperation and, significantly, it all started during the Cold War. In 1951, after signing the Point Four Development Programs, the US became the first bilateral donor to Nepal. The late 1940s and 1950s were a remarkable period for Nepal, as its neighbours went through significant changes. In 1947, India, the southern neighbour, gained ndependence. In 1949, Mao Zedong took control of China and began the long march towards consolidating political and military hold on Tibet, which borders Nepal to the north. It was also a period when India and China were beginning to get at loggerheads in the disputed Himalayan region, which eventually led to the 1962 border war.

However, America was still a new player in South Asia, even as World War II had catapulted it onto the world stage, as historian Thomas Robertson notes in his essay (“Frontline of the Cold War”: The US and Point Four Development Programs in Cold War Nepal) in a newly published book Nepal in the Long 1950s. “Squeezed between India and Chinese-controlled Tibet, Nepal possessed growing strategic value.”  

America had a great influence in shaping the postwar world order. Named after the fourth point of President Harry Truman’s 1949 inaugural address, the Point Four Programs provided technical assistance and economic aid to underdeveloped countries. President John F Kennedy in November 1961 brought the foreign development assistance under a single agency, the U.S. Agency for International Development (USAID), the American government’s lead provider of non-military aid.

Fast forward to 2022, USAID signed a five-year “strategic plan” with the Nepal government, committing $659 million. The agreement outlines the broad development areas of cooperation and collaboration and supports Nepal’s goal of graduating to a middle-income country, working in partnership with the government, civil society and the private sector. The emphasis is on strengthening democratic governance, enterprise-driven economic growth and increased resilience for communities most at-risk to natural disasters and climate change. But questions have arisen about whether Trump 2.0 has any appetite for these programmes, including the idea of inclusion, a cardinal political pillar of Nepal’s new constitution and polity post-2006.   

With the current aid suspension, news reports and experts in Nepal variously claim some two dozen INGOs and hundreds of NGOs are being impacted. Many of the projects are run by the Nepal government, and the budgetary impact could be as high as $200 million. 

Largest US grant to continue

By all accounts, however, the 90-day hiatus will not impact the US-assisted Millenium Challenge Corporation’s (“MCC”) Nepal Compact — the single largest grant Nepal has ever received. The aid is being used for building transmission lines and improving roads. Nepal contributes $197 million to the MCC Compact. If the recent statements from the U.S. government is anything to go by, MCC projects are not in danger. According to a January 26 statement by the State Department, Trump’s executive order “on Reevaluating and Realigning” the foreign assistance only covers those areas “funded by or through the State Department and USAID.”

Nepali officials also believe the MCC Compact will not be affected since it is outside the purview of the ongoing revision, and, additionally, it is jointly funded by the US government and Nepal. One component of the MCC investment aims at enhancing regional energy trade between Nepal and India. Valued at $12.36 million, a transmission line in Nepal’s western Terai will connect it with the Indian power grid.

No end to dilemma

For now, however, the suspension of US aid has sparked significant discussion on Nepal’s social media and in the press, reflecting public concern over the potential negative impact on essential services and development projects. Significantly, the recent shifts in American foreign policy have resulted in new small-state anxieties in Nepal, just as in Sri Lanka and Bangladesh, that far outweigh the development budget Trump’s move has put on hold. To many in Nepal, the possibility of the aid withdrawal

by America, or ‘Third Neighbour,” could lead to even greater reliance on two immediate ones — India and China in the long term. America’s great-power rival, China might even relish this prospect in the South Asian theatre.

Akhilesh Upadhyay is former Editor-in-Chief of The Kathmandu Post and a Senior Fellow at Center for Strategic Affairs at IIDS, a Kathmandu-based think tank. Views expressed are personal.

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