Nepal’s budget preparation has been affected following the suspension of majority of US aid, leaving Finance Ministry officials uncertain about resource availability for the upcoming fiscal year. The US government recently announced a three-month suspension of funding for the Millennium Challenge Corporation (MCC) and the US Agency for International Development (USAID). According to official data, the US has entirely canceled 34 projects in Nepal worth $329.4 million (over Rs 46 billion) that were to be funded through USAID. As Nepal’s largest bilateral donor, the US had committed $550 million through MCC and $658 million through USAID over five years in 2022. However, this funding is now under scrutiny.

A senior official from the International Financial Assistance Coordination Division at the Ministry of Finance stated that securing foreign aid is crucial for the upcoming budget, but the US aid suspension has made it difficult to estimate future assistance. “With aid being cut, ongoing projects are at risk of being stalled,” the official said.

Foreign aid has historically played a significant role in Nepal’s budget, but its share has declined over the past decade due to increased domestic revenue. Before the mid-term review of the current fiscal year, Nepal had targeted Rs 270 billion in foreign aid, accounting for 14.51% of the total budget. However, following the US suspension, European nations have also started cutting aid, prioritizing defense spending amid the Ukraine war. This has raised concerns over the level of foreign assistance to be included in next year’s budget.

The suspension has particularly impacted MCC-funded infrastructure projects, including power transmission lines and road maintenance. Work on 400 kV transmission lines from Lapsiphedi to Ratmate, Hetauda, Damauli, Butwal, and the Indian border, along with substations at Ratmate, Damauli, and Butwal, has come to a halt. The MCC grant was expected to cover $400 million in transmission line construction. Similarly, the East-West Highway upgrade, covering 100 kilometers from Chanauta (Kapilvastu) to Shivakhola (Dang and Banke) with $52 million from MCC, has been affected.

The USAID suspension has also impacted four key projects in Nepal’s health, agriculture, education, and governance sectors. The health project aimed to strengthen Nepal’s healthcare system by working with federal, provincial, and local governments. The agricultural initiative was designed to ensure food security for 69,000 households. The education project focused on expanding access to quality education, particularly for disadvantaged and marginalized children. The governance project sought to promote inclusion and good governance, with an expected contribution to policy-making.

The suspension of these projects has cast uncertainty over their future, along with numerous NGO-led initiatives supported by USAID. US Secretary of State Marco Rubio recently stated that 83% of USAID-funded programs worldwide would be canceled, affecting 5,200 contracts that "do not align with America’s core interests."

In response, the Finance Ministry is exploring alternative funding sources. Shyam Prasad Bhandari, Joint Secretary at the Ministry of Finance, stated that while no immediate replacements for USAID projects have been sought, the government may turn to donor agencies such as the Asian Development Bank and the World Bank if the aid suspension persists. “As we finalize the budget, a decision must be made within mid-April,” he said, adding that Nepal may have to fund some projects independently with donor assistance.