In his first tenure as President of the United States, Donald J Trump’s familiarity with Nepal was, at best, minimal. During a 2017 meeting, he reportedly mispronounced Nepal as “nipple” and humorously referred to Bhutan as “button.”  These incidents, while seemingly trivial, underscored a broader lack of US’s engagement with small nations. However, as Trump began his second term on 20 Jan 2025, his approach to Nepal appeared to shift.

This time, not only did he correctly pronounce the country’s name, but he also delved into specific projects funded by the United States Agency for International Development (USAID) in Nepal. For instance, he controversially labeled a $20m allocation for fiscal federalism in Nepal as a “fraud,” though he failed to elaborate on why he held this view. This statement, while brief, has had significant repercussions in Nepal, particularly among anti-federal forces who have long argued that federalism is a foreign-imposed agenda.

Trump’s comments have provided a significant boost to these anti-federal forces, who are actively working to dismantle Nepal’s 2015 constitution. For years, these groups have claimed that federalism is not an indigenous concept but rather a product of foreign influence. Trump’s assertion that USAID’s funding for federalism is fraudulent has been interpreted by these groups as validation of their stance. As a result, many anti-federalists have become vocal supporters of Trump, believing that his administration aligns with their opposition to federalism. This development has added a new layer of complexity to Nepal’s domestic politics, as the debate over federalism continues to polarize the nation.

The impact of Trump’s policies on Nepal extends far beyond rhetoric. In late January 2025, Trump issued an executive order pausing all US foreign assistance for 90 days. While this move has affected numerous countries, its impact on Nepal has been particularly severe. Unlike larger nations such as China, which have been primarily affected by Trump’s trade tariffs, Nepal’s reliance on foreign aid makes it especially vulnerable to aid cuts. For a country that has long depended on international assistance to support its economy, health, education, and infrastructure, the suspension of US aid has been nothing short of devastating.

The immediate effects of the aid suspension are already being felt. From small stationary shops to five-star hotels, businesses that relied on the patronage of NGOs and INGOs funded by USAID are experiencing significant downturns. Stationary shop owners report a sharp decline in sales, as NGOs were among their primary customers. Similarly, hotels that once hosted events organized by international organizations are now struggling to maintain their revenue streams. Domestic airlines have also been hit hard, with a noticeable reduction in flights to major cities like Pokhara, Surkhet, Kailali, and Biratnagar, where NGO activities were once frequent. While precise numerical data on the economic impact of these changes is not yet available, it is clear that the suspension of US aid has disrupted one of the key drivers of Nepal’s hospitality and service sectors.

The ripple effects of the aid pause extend to local non-governmental organizations (NGOs) that depend on USAID funding. Many of these organizations are now downsizing or shutting down entirely, as they receive termination notices for projects funded by USAID or its implementing partners. Over the past few years, USAID had shifted its approach, working directly with local NGOs in an effort to bypass Kathmandu-based partners that were seen as ineffective. This shift had led to the establishment of branch offices in provinces like Lumbini and Madhes, where many NGOs focused their activities. Now, these offices and their staff face an uncertain future, as the suspension of funding leaves them without the resources to continue their work.

The challenges are not limited to local NGOs. American institutions operating in Nepal are also grappling with the fallout from Trump’s executive order. Many are laying off staff and considering whether to close their offices altogether. The lack of clear guidance from US headquarters has left these organizations in a state of confusion, unsure of how to proceed. Some have already terminated employee contracts due to a lack of funds to pay salaries. Even organizations aligned with the Republican Party’s agenda are not immune to these challenges, as the pause on foreign assistance applies across the board.

One of the most significant casualties of Trump’s aid suspension is the Millennium Challenge Corporation (MCC), a US-funded initiative that signed a $500m compact with Nepal in Sept 2017. The MCC compact aims to improve road quality, increase the availability and reliability of electricity, and facilitate cross-border electricity trade between Nepal and India. However, the project has been mired in controversy since its inception. From 2019 to 2022, the MCC became a divisive issue in Nepali society, with the country’s communist parties leading the charge against it. They argued that the MCC was part of the US Indo-Pacific Strategy (IPS) and should be rejected. China also opposed the project, labeling it a “Pandora’s box” that could undermine Nepal’s sovereignty.

Despite these objections, the Joe Biden administration worked tirelessly to secure parliamentary approval for the MCC. Senior US officials reportedly pressured Nepali leaders, even threatening to review bilateral relations if the compact was not endorsed. In the face of this pressure, Nepal’s political parties eventually approved the MCC in 2022, accompanied by a declarative interpretation stating that the compact was not part of the IPS. Since then, MCC projects have been making steady progress. However, Trump’s decision to suspend all foreign assistance for 90 days has brought these projects to a halt, raising concerns about whether the MCC will meet its five-year deadline. The suspension has also reignited political debates over the MCC, with opponents seizing the opportunity to renew their calls for its cancellation.

The broader implications of Trump’s aid suspension are deeply concerning for Nepal. Over the past few decades, Nepal has become increasingly dependent on foreign aid to address critical challenges in areas such as education, health, and climate change. Rather than reducing this dependence, the country has seen it grow. The sudden withdrawal of US support has exposed Nepal’s vulnerability, as the government lacks the resources to fill the void left by the aid cuts. For example, the US has officially canceled $19m in funding for biodiversity conservation, a critical issue for Nepal, which is on the frontlines of climate change. The loss of this funding will have dire consequences for Nepal’s ecosystems, which are already experiencing shifts in species distribution and an increased risk of extinction for many native plants and animals.

The suspension of funds for fiscal federalism and the cancellation of regional projects will further exacerbate Nepal’s challenges. These cuts come at a time when the country is already grappling with political instability, economic uncertainty, and the ongoing effects of climate change. The Nepal government and political parties have yet to officially respond to the aid suspension, as they are waiting to see whether the US will resume support after the 90-day pause. However, early indications suggest that the Indo-Pacific region remains a top priority for the Trump administration, which could mean continued support for Nepal, albeit through new mechanisms or agencies.

Some analysts speculate that the Trump administration may offer increased assistance to Nepal in exchange for reduced engagement with China. There are already murmurs within Nepal’s diplomatic circles that the US could pressure Nepal to scale back its participation in China’s Belt and Road Initiative (BRI), similar to what occurred in Panama. Additionally, there are concerns that the US may push Nepal to abandon its longstanding policy of non-alignment and align more closely with Western powers. Such a shift would represent a fundamental change in Nepal’s foreign policy, which has traditionally sought to maintain balanced relations with all major powers.

Given Nepal’s geopolitical position, experts argue that the country cannot afford to abandon its policy of non-alignment. Sandwiched between two regional giants, India and China, Nepal must navigate a delicate balancing act to preserve its sovereignty and independence. If the US ultimately decides to cut aid to Nepal, there are discussions within the political sphere about seeking support from other middle powers, such as the United Kingdom, Germany, South Korea, and Japan, to fill the void left by the US withdrawal. These countries are already exploring ways to support Nepal in critical areas if US assistance is not resumed after the 90-day pause.

The reduction of US influence in Nepal could be seen as a positive development for both India and China, which have long been wary of America’s growing presence in the region. However, it remains unclear how the Trump administration’s policies will evolve and how Nepal’s major political parties will respond to this new reality. Compounding the uncertainty is the fact that Nepal’s Embassy in the US is currently without an ambassador, as the newly appointed envoy has yet to assume office. In Kathmandu, think tanks and policy experts have begun deliberating on the potential impact of Trump’s policies and how Nepal should navigate this challenging period.

The Trump administration’s approach to Nepal has already shaken the foundations of the longstanding partnership between the two countries. The suspension of US aid is having far-reaching consequences, affecting everything from local businesses to large-scale infrastructure projects. As Nepal grapples with the fallout from these changes, it must also contend with the broader geopolitical implications of reduced US engagement. The coming months will be critical in determining the future of Nepal-US relations and the extent to which Nepal can adapt to this new reality.