Nepal, the small Himalayan nation bordering China, was negotiating with Beijing over a major injection of infrastructure financing when the United States stepped in with a lucrative offer.
Over five years, the American government would give the country $500 million in grants to expand its electricity grid and improve its roads — a huge sum in a country where the average annual income is about $1,400.
The U.S. challenge to China’s sway in its own region angered officials in Beijing. But Nepal, after five years of divisive debate, went ahead and accepted the offer, ratifying it in 2022 after coming up with $200 million of its own.
Now, the project has been thrown into doubt with the Trump administration’s freeze on foreign aid. Nepali leaders who had sided with the United States, backing the deal even as opponents called them U.S. puppets and traitors, are wondering if they made a terrible mistake in putting their faith in America.
“This is quite shocking,” said Rajendra Bajgain, a lawmaker from the governing Nepali Congress party, who had argued passionately for the U.S. project. “They are making it easier for our neighboring countries, especially the Chinese, who are enjoying themselves. They will come to our office and say, ‘See, this is how America acts.’”
It is not clear if China has made any direct overtures to Nepal as the United States pulls back. But Beijing has been handed openings by President Trump’s gutting of foreign aid and other moves that have alienated U.S. allies and partners. Some of them, like India, may find it harder to challenge China’s growing assertiveness in Asia without the backing of the United States, particularly its financial muscle.
The infrastructure grant to Nepal was made through the Millennium Challenge Corporation, an agency established by the U.S. Congress in 2004 during the George W. Bush administration. It has an annual budget of only about $1 billion, but it provides funding for programs around the world, including ones aimed at limiting the influence of China in Asia and Africa.
The bulk of the Nepal grant was to be used to build a nearly 200-mile transmission line that would connect its power grid with India’s, helping the country generate revenue by selling surplus electricity to its giant neighbor. The money would also help Nepal maintain about 200 miles of roads, helping to knit together a nation divided by its rough terrain.
Some small, early contracts have been awarded, and work on parts of the project, including substations, has started. But on Tuesday, after remaining in the dark for weeks, Nepal announced that it had been told by the United States that funding for the program had been suspended for at least 90 days.
The Millennium Challenge Corporation plans to apply to the State Department for waivers to keep eight large-scale programs, including the one in Nepal, on track, according to a U.S. official, who spoke on the condition of anonymity to discuss internal deliberations.
The halt to U.S. grant money could impose serious hardships on recipient nations. If they are forced to break contracts, their already significant debt could grow. In the case of Nepal, it could incur a liability if it does not abide by its agreement with India to transmit electricity, the U.S. official said.
Large hydropower projects in Nepal will also be affected if the transmission line is not completed, said Semanta Dahal, a lawyer who was part of the grant ratification process.
Nepal had to overcome China’s heavy influence to strike the agreement with the United States in 2017, during Mr. Trump’s first administration.
The mountain nation, with a long history of communist politics, has some affinities with China. The deal’s detractors warned that it would mean a surrendering of sovereignty to the United States and stoked fears that American troops would someday arrive.
China worked to amplify the doubts. “Is it a gift or Pandora’s box?” Hua Chunying, a spokeswoman for China’s Foreign Ministry, said as the debate was playing out in Nepal. “I’m afraid it will turn out like a Nepalese saying: It looks good, but you will find the meat difficult to chew.”
Supporters of the deal fought back, saying they would defend it “in the Parliament and on the streets.” They pointed out that it was a grant from a democratic country and did not have strings that often come with Chinese loans, such as having to use Chinese contractors, which have overburdened some poorer borrowers.
Nepal would soon experience this problem itself: It is on the hook for an international airport, at a significantly inflated price, without the necessary passenger numbers to repay the $200 million China lent to build it. That loan came around the same time that the Americans stepped in with their grant.
“It was risky, hard,” Gagan Thapa, a member of Parliament, said about the process of agreeing to the U.S. grant. “There were several geopolitical complexities.”
The two countries surmounted those challenges, Mr. Thapa said, “based on Nepal-U.S. relations, and for the benefit of Nepalese people.” But as Mr. Trump turns America inward, that benefit may be fleeting.
