A Geopolitical Shift: Reassessing Nepal's Priorities Beyond the US Aid Freeze

In a world increasingly defined by geopolitical shifts and evolving international priorities, the recent temporary freeze on US foreign aid to Nepal marks a pivotal moment in the country's development trajectory. For decades, Nepal has relied on American assistance to fuel growth in critical sectors such as health, infrastructure and education, among others. The sudden withdrawal of this support, although temporary, raises urgent questions: What does this mean for Nepal's ability to meet its developmental goals? How will the country balance maintaining strong international relations while accelerating efforts to become more self-reliant?

As the freeze reverberates through the corridors of power and policy, Nepal faces an unprecedented challenge: to adapt, innovate, and rethink its long-term strategies. While the immediate impact on sectors like public health and infrastructure is clear, the deeper implications of this shift may alter Nepal's development landscape for generations to come. Will Nepal rise to the occasion and seize this opportunity to strengthen its domestic capabilities and foster new partnerships, or will the absence of US foreign aid expose vulnerabilities that impede progress?

In this opinion segment, Purushottam Ojha, Former Secretary, Government of Nepal; Yatindra KC, Researcher, Samriddhi Foundation; Sajina Rai, Programme Director & Research Fellow (Foreign Affairs), Asian Institute of Diplomacy and International Affairs; and Anil Chitrakar, Social Entrepreneur, delve into the complex layers of the US aid freeze – examining its economic, diplomatic and social consequences – and explore how Nepal’s policymakers and thought leaders can navigate this new era of development in a rapidly changing world order.

What is the anticipated outcome of the temporary suspension of US foreign aid on Nepal's economy and development projects if it is to exceed the 90-day suspension?

Purushottam Ojha: The suspension of the support under USAID funding has already started showing adverse impacts on implementing maternal health, vaccinations, nutrition, food aid and social inclusion-related programmes as the funds are frozen for running these USAID-funded programmes and projects. Besides, the government organisations, there are several such projects run by INGOs in association with the national NGOs. It is difficult to forecast the future steps of the US administration as the DOGE chief Elon Musk has made a very cynical remark about USAID. It is obvious that the 90-day suspension will deter the delivery of services by the entities who are running the programmes.

The fate of the aid which has been subsumed into the State Department, by the latest proclamation, is unpredictable and mysterious. A large number of least-developed and developing countries, particularly in Asia and Africa, are the beneficiaries of the programmes. Among various programmes, those related to public health, nutrition, food and education will have a direct impact on the services delivered to poor people. Hence, the government should develop contingency plans to continue the service to the deprived section of the people while contemplating the potential long-term suspension or cancellation of the USAID programmes.

There is nothing as a free lunch.” Every development partner has its interest in providing development assistance to other countries. So, the best alternative lies in mobilising the national resources for the development of the infrastructure and boosting economic growth. Foreign assistance is unpredictable and normally associated with various covenants, overt or covert. Hence, investment in industrial establishments and greater market access for goods and services are the potential conduits for maintaining resiliency in the economy.

Purushottam Ojha

Former Secretary, Government of Nepal

Yatindra KC: The US foreign aid to the government of Nepal accounts for 0.122% of the entire budget. A majority of US foreign aid to Nepal is Off-Budget Off-Treasury meaning funds are not provided to the Government of Nepal but rather spent by the USAID through civil society organisations via open calls based on the country's development strategy. The only development project of significant scale that I am aware of is the MCC. So far it remains unaffected and it is likely not going to be affected given that the funding is based on a bilateral treaty/agreement.

The anticipated outcome remains marginal, in the short-term people working in the development sector are likely to lose their jobs. The larger question here is the effect that aid has on our civil society. Has the civil society in Nepal responded to the needs of the people or have they aligned their goals to meet the development strategies of the aid agencies, do aid agencies design their country strategies with the political economy of Nepal in mind? These are questions worth asking. If the suspension order exceeds 90 days, we might even start a discussion around these issues, absent that things will be business as usual. 

Sajina Rai: US being one of the largest bilateral donors of Nepal, the recent suspension of US foreign aid has already begun to impact on critical humanitarian and development work in the country. As some reports suggest that at least four projects including health, education, agriculture and inclusive policies run by the Nepal government in partnership with USAID has been halted for 90 days. Additionally, more than 300 development partners are affected for at least three months.

Besides, there are businesses like hospitality industry and airlines likely to have immediate effect from this decision. For example, many hotels across Nepal, which heavily depend on business from these kinds of projects and programmes, will have huge impact on their revenue.

If it exceeds 90 days it may cause health crisis, educational setbacks and prolonged economic strains in Nepal; not only federal government but also subnational and local governments will suffer. Most of the aid is allocated to health, malnutrition and women empowerment in Nepal, therefore, the most vulnerable groups will be children and women. And there is a risk of surge in unemployment due to halted projects and programmes. It will also have negative impact on social indicators largely hitting hard on Human Development Index (HDI), apart from economic growth as a result of reduced development activities.

The anticipated outcome remains marginal, in the short-term people working in the development sector are likely to lose their jobs. The larger question here is the effect that aid has on our civil society. Has the civil society in Nepal responded to the needs of the people or have they aligned their goals to meet the development strategies of the aid agencies, do aid agencies design their country strategies with the political economy of Nepal in mind? These are questions worth asking.

Yatindra KC

Researcher, Samriddhi Foundation

How is such a funding gap or lacuna addressed?

Purushottam Ojha: First, the government of Nepal requires making a quick assessment of the impact of aid suspension in various sectors of the development programmes. There would be a need to mobilise additional human and financial resources to plug the resource gaps. The alternative plan should be developed by the federal government, and the provincial government and the municipalities should be persuaded to work in unison to mobilise the resources that they have within their reach. The government of Nepal may reach out to other development partners and multilateral financing institutions to provide their support to implement the alternative/contingency plans.

Yatindra KC: The funding to the government of Nepal is not significant enough to warrant a re-strategising. It can easily address the funding gap through either internal or external debt. The funding gap for civil society is likely going to be hard to bridge. Whether civil societies have spent the money on the right things is a different question altogether. 

Sajina Rai: Under the Trump administration, it is clear that the US is unlikely to provide new aid and there is uncertainty of continuation of the halted programmes, therefore a significant gap or lacuna will be created. To address this, Nepal must diversify its sources of foreign grants and development partners, such as countries like China, Japan or other developed nations. While it is unfortunate, but the reality is that Nepal cannot fill the gap by itself. So, it is important to engage with other players to bridge the void. In the meantime, Nepal must work hard on diversifying and strengthening its economy and be more self-reliant so that such situations do not arise in the future.

With ever changing global and geopolitical dynamics, how should Nepal reduce its reliance on foreign aid especially for infrastructure development and economic growth?

Purushottam Ojha: This is also an opportunity for the government of Nepal to dwell upon and evaluate the performances of the foreign-aided projects in Nepal and their implementation modality. There is also a broad understanding that in the current ecosystem of foreign aid mobilisation, most of the financial support granted to the least developed countries and developing countries goes back to the donor country through their expatriate staff who are paid a hefty amount as salaries and other benefits on one side and the purchase of equipment, machinery and transport vehicles from such donor countries at the other. A very paltry amount goes to the intended beneficiaries.

There is a famous saying that “There is nothing as a free lunch.” Every development partner has its interest in providing development assistance to other countries. So, the best alternative lies in mobilising the national resources for the development of the infrastructure and boosting economic growth. Foreign assistance is unpredictable and normally associated with various covenants, overt or covert. Hence, investment in industrial establishments and greater market access for goods and services are the potential conduits for maintaining resiliency in the economy. The government should endeavour to mobilise the internal resources for financing the development projects and, at the same time, try to diversify the sources of foreign aid. Financing from multilateral financing institutions could be a relatively reliable source of development funding.

Nepal must diversify its sources of foreign grants and development partners, such as countries like China, Japan or other developed nations. While it is unfortunate, but the reality is that Nepal cannot fill the gap by itself. So, it is important to engage with other players to bridge the void. In the meantime, Nepal must work hard on diversifying and strengthening its economy and be more self-reliant so that such situations do not arise in the future.

Sajina Rai

Programme Director & Research Fellow (Foreign Affairs), Asian Institute of Diplomacy and International Affairs

Yatindra KC: I suppose we are talking about bilateral aid and not multilateral aid. Bilateral aid accounts for about 2.8% of the total budget, not really a significant amount. Of this, a majority is spent on programme-related expenses; bilateral and even multilateral aid-financed development (specifically in terms of infrastructure) is very low in Nepal. Thus, the argument that we are reliant on foreign aid for infrastructure development is untrue. There is not a causal relation between foreign aid and economic growth either, rather one can find instances of governance breakdown because of aid. 

So far, neither Nepal’s infrastructure development nor economic growth has relied on foreign aid, instead, foreign aid-financed projects have had very little effect. We can even find the use of foreign loans to support projects that are merely a means to garner public support. The Prime Minister's Unemployment Programme is one example, and so is the agriculture modernisation programme and the numerous view towers built. Regardless, it is time to evaluate the effect of aid. There are some conversations about the matter in some circles, but discourses remain limited. Something to explore in the future is the effect of foreign aid on transparency and accountability in Nepal and the incentives it provides to current bureaucrats.

Sajina Rai: In the broader realm of geopolitics there is high probability that global powers like China would step in and fill the vacuum, but in the long run it is not sustainable. Nepal must diversify and strengthen its economy to reduce its reliance on foreign aid. For infrastructure development, Nepal must forge partnerships with multilateral lenders. To achieve this Nepal must focus on increasing domestic revenue generation by economic reforms. This can be accomplished through various means such as encouraging public private partnership, effective resource mobilisation, promoting foreign direct investment (FDI) in key sectors like hydropower, tourism and agriculture. Additionally, strengthening regional and multilateral cooperation, as well as investing in human capital and innovation, will be very crucial for economic growth.

In light of the recent cut, will the five-year Country Development Cooperation Strategy for Nepal that finishes by 2025-end go ahead?

Purushottam Ojha: Nothing is predictable at this stage since all the USAID programmes are now suspended and the responsibilities are shifted to the State Department. A flurry of presidential decrees is being issued from the White House every day that implies the formation and dissolution of various institutions as well as policies and programmes. The USA has remained an important development partner of Nepal since 1950s, providing support in multiple sectors; from maternal. and child health, education, human resources development, infrastructure development, and rural development, among others. We can only hope that the USA will continue to lend its generous support for the socio-economic development of Nepal. I am hopeful that the support will continue in one form or the other even in 2025 or beyond. 

Yatindra KC: I do not know, nor is it really important. That countries evaluate their processes and strategies once the government changes are natural. If the current strategy is changed, I would not be surprised, the larger question is how is the civil society going to adapt given the recent cuts.

Sajina Rai: Under the five-year Country Development Cooperation Strategy for Nepal, about 50% of the committed budget has already been disbursed. However, uncertainty looms over the other half of the budget. The US has made it clear that every dollar it spends must align with its national interest. With US President Donald Trump strongly opposing issues like climate change and gender equality many of the USAID projects and programmes in Nepal that are based upon equity and inclusiveness such as gender issues and inclusiveness, women empowerment, family health, and nutrition are at the risk of being discontinued. And it is certain that the Trump administration will not be supporting any new programmes under these issues.

This opinion piece is being written at a time when we have a 90-day pause on USAID in Nepal. To start with, we must recognise that the American people are some of the most generous and do not hesitate to step up when challenges make demands from them. In Nepal, some readers may need a little reminder that the forestry and agricultural colleges, the ropeway from the terai to Kathmandu, the Janak education materials facility at Thimi, the east-west highway between Hetauda and Narayanghat are all gifts to Nepal from the American people.
Today, the USA is led by individuals who have not seen the real value of what they have done for Nepal and the people, mostly because they have never travelled outside the USA. They also see poverty at home and feel that their government is not doing enough for them. Charity should begin from home. The combination of these two factors has led to a new politics that is based on ‘America first’ at the core. Like the Government of Nepal which pays itself and its recurring costs by levying tariffs on imported goods, there are people in the White House who believe that USA can become rich and create a sovereign fund to buy TikTok by putting hefty tariffs on imported goods. 
The 90-day pause for USAID is part of this narrative that the whole world is taking advantage of the USA and not giving back enough to it. The USA is being treated like the world’s garbage can. We heard the same conversation after 9-11 when many Americans could not explain why anyone in the world would want to do any harm to them. 

The 90-day pause may be an opportunity in disguise if we use it to find answers to these and other related questions. Shortage and crisis often bring out creativity and innovation. We do have money to build view towers. Let us get our priorities right.

Anil Chitrakar

Social Entrepreneur

Moving forward, clean air should be a priority for all of us whether USAID funds a project or not. If we do not want to see Nepal go through another armed conflict, we have to embrace inclusion whether or not the US leadership likes it. We must ensure a healthy forest with all its globally unique biodiversity whether it gets external funding in general (USAID in particular) or not.
The pause in USAID should be used to have a broader debate in Nepal beyond how many airline tickets and hotel room cancellations have happened or how many houses are going to be empty if the projects that housed them cannot pay the rent. During the pause, we shall have to ask ourselves many difficult questions. The first of which would be if we, as Nepalis, are okay with all the conditions that will come with the new USAID. Can we or should we endorse US claim to Greenland, Canada being a state of the USA, and the forced handover of the Panama Canal so the Chinese will lose control? Should the Ukraine war be financed in exchange for access to its rare earth mineral deposits?
If not, we have a real challenge. Denmark, China and Canada have also helped Nepal in the past and are our friends. The second question that we need to ask is if diversity, equity and inclusion are removed from USAID, what are we going to use aid resources for? The third question we need to ask is if we have a cohesive and shared development strategy for Nepal, the resources we have and a clear picture of the gap? 
Making a wish list by compiling smaller wish lists at Singha Durbar is not a development strategy. We are weak in governance and improving governance does not require foreign aid. The 90-day pause may be an opportunity in disguise if we use it to find answers to these and other related questions. Shortage and crisis often bring out creativity and innovation. We do have money to build view towers. Let us get our priorities right.