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How do you make the case for US foreign aid to an Administration that has proposed slashing it? That was the task for Mark Suzman, Chief Strategy Officer and president of Global Policy and Advocacy for the Bill & Melinda Gates Foundation.
Suzman came to CGD in between accompanying Bill Gates to meetings at the White House. At an event called Financing the Future—which also included CGD’s president Masood Ahmed, senior fellow and chief operating officer Amanda Glassman, and former finance minister of Liberia (and now CGD distinguished visiting fellow) Antoinette Sayeh—Suzman gave us two very different versions of the fight against global poverty and disease.
When US Treasury Under Secretary David Malpass appeared before Congress just five months ago, he indicated that the World Bank “currently has the resources it needs to fulfill its mission” and went on to characterize the bank and other multilateral institutions as inefficient, “often corrupt in their lending practices,” and ultimately only benefitting their own employees who “fly in on first-class airplane tickets to give advice to government officials.”
From that standpoint, it would be hard to imagine US support for a significant injection of new capital into the World Bank’s main lending arm, the IBRD, as well as the bank’s private sector lender, the IFC.
And yet, that’s exactly the surprising outcome just announced at the World Bank’s spring meeting of governors. Not only is the Trump administration supporting a $7.5 billion capital increase for the IBRD (and at that, one that is 50 percent larger than the capital increase supported by the Obama administration in 2010), it has also signed on to a policy framework for the new money that makes a good deal of sense.
Here are the highlights:
The capital increase package will better enable the institution to deliver on its commitment to be a leader on climate finance and more broadly in support of global public goods, aligning with key recommendations from CGD’s 2016 High Level Panel on the Future of Multilateral Development Banking. Under the agreement, the climate-related share of the IBRD’s portfolio will rise from the current 21 percent to 30 percent. The IFC’s share will rise even higher to 35 percent. New ambition on the climate agenda also includes commitments to screen all bank projects for climate risks and incorporate a carbon shadow price into the economic analysis of projects in emissions-producing sectors. For global public goods more generally, the agreement newly commits a (very modest) share of IBRD annual income to global public goods.
The package introduces the principle of price differentiation based on country income status, with higher income countries paying more than the bank’s other borrowers. This proposal, which was also put forward by CGD’s High Level Panel in 2016, will generate additional revenues for the bank and asks more of countries that have less financing need. While the introduction of the principle marks an important step forward, the actual price differentiation is extremely modest—at most, the spread between high income borrowers will be just 45 basis points on IBRD lending rates of about 4 percent.
The package assigns new guidelines for the IBRD’s overall lending portfolio to channel 70 percent of the bank’s resources to countries with per capita incomes below $6,895 and 30 percent to countries above this so-called “graduation threshold.” These targets would not be binding when it comes to crisis lending. In practice, these new guidelines seem to align with the existing pattern of IBRD lending, as indicated in the figure. In this sense, the idea that these guidelines amount to cutting China's access to World Bank loans appears exaggerated, though over time, as more countries join the higher income category, the 30 percent share will be allocated across more borrowers.
The package also attempts to identify a new financial framework that requires greater discipline when it comes to tradeoffs between lending volumes, loan pricing, and the bank’s administrative budget. This framework, which reportedly was a priority for the US government, may not ensure that this will be the last ever capital increase for the World Bank (as an unnamed US official promises), but it does appear to introduce a greater level of coherence around financial/budgetary decisions that have historically proceeded in a disjointed fashion within the institution.
Finally, even as the agreement seeks greater differentiation among countries, it reaffirms the World Bank’s commitments to stay engaged with all its client countries, including China. In fact, given US rhetoric, it’s surprising that the agreement does not stake out any new ground on the subject of country graduation. In fact, it seems to go out of its way to reassure all current bank borrowers that they are still welcome and that the decision to graduate from assistance is theirs to make. In the end, as much as ending China’s borrowing from the bank would have been a political prize for the Trump administration, US officials appear to have taken a sensible policy path that favors good incentives over polarizing fiats.
International actors have criticized decisions by the Trump administration to reject the Paris Climate Accord, abandon the Trans Pacific Partnership, and withdraw from a United Nations declaration intended to protect the rights of migrants. However, there is one international body, the Paris Club, whose members may be rooting for the United States to leave. That’s because, in the absence of congressional action, continued US membership in the Paris Club could impair the economic prospects of some of the poorest countries in the world.
Some context on the Paris Club
The Paris Club, which first convened some 60 years ago, is a group of government representatives whose most important function is to negotiate agreements to reduce or relieve outstanding debt between debtor countries and Paris Club members. Over the years, the Club has concluded 433 agreements with 90 different debtor countries, with the number of agreements peaking at 24 in 1989. In recent years, as shown in the chart below, there has been little to no activity:
Paris Club Agreements by Calendar Year
In its negotiations with debtor countries, the Club operates in accordance with six principles:
Case by case: The Paris Club makes decisions on a case-by-case basis in order to tailor its action to each debtor country's individual situation.
Comparability of treatment: A debtor country that signs an agreement with the Paris Club agrees to seek comparable terms from all bilateral creditors, including non-Paris Club commercial and official creditors.
Conditionality: Agreements with debtor countries will be based on IMF reform programs that help ensure the sustainability of future debt servicing.
Consensus: Paris Club decisions cannot be taken without a consensus among the participating creditor countries.
Information sharing: Members will share views and data on their claims on a reciprocal basis.
Solidarity: All members of the Paris Club agree to act as a group in their dealings with a given debtor country.
The United States has historically played a major role in the Paris Club, due, in part, to the large number of loans and guarantees it has extended to other countries over the years. But as the result of a shift from loans to grants, US credit exposure to sovereign governments has fallen dramatically—from over $90 billion USD in 1999 to roughly $35 billion today—and much of what remains is in the form of guarantees. The number of countries that owe the United States money or have a guarantee has dropped from 135 to 85 over the same period.
US Government Credit Exposure to Official Obligors
Here’s the problem:
In cases where the US government is still a creditor, the consensus principle (cf. principle 4 above) stops any Paris Club debt negotiation from proceeding without US participation, but the United States is unlikely to participate in any agreement that requires debt reduction due to current budget constraints.
At the beginning of each negotiation process, the IMF seeks assurances (“financing assurances”) from individual Paris Club creditors that they are willing to provide the debt relief needed to fill the financing gap built into the debtor country’s IMF program (cf. principle 3 above). Historically, the US Paris Club representative has not provided such assurances without having the necessary authorization and appropriation of funds for debt reduction from Congress.
Under the Federal Credit Reform Act of 1990, an appropriation by Congress of the estimated cost of debt relief—on a net present value basis—is required for debt reduction. And there is a value for all debt owed to the United States, even if it hasn’t been serviced in decades (which is the case for several countries that currently owe money to the United States).
Unfortunately, the United States currently lacks any authorization or appropriation for debt relief so it is not in a position to provide the IMF with any financing assurances. Moreover, the outlook for future US funding isn’t great. The administration’s FY 20198 budget request seeks reduce the foreign assistance budget by almost 30 percent and there is no request to authorize debt relief. Congress, too, has shown little interest in providing funding for debt relief. Appropriators consistently rejected requests to fund the US commitment to the Multilateral Debt Relief Initiative—to the point where the Obama administration stopped asking.
What’s more, the US budget process itself creates an enormous obstacle to future US participation in Paris Club agreements. The process for formulating a budget begins almost a year before the fiscal year begins, which means that Treasury Department planners are asked to anticipate the need for funding almost two years in advance of an actual request for financing. This is at odds with events in the real world, where liquidity and solvency issues in debtor countries can evolve quickly.
To date, neither the executive nor the legislative branch have demonstrated a willingness to establish “rainy day” funds for unforeseen emergencies. In the past, this problem has been avoided by packaging a request for debt relief money as part of a large, multilateral initiative such as the Heavily Indebted Poor Country Initiative, or by including it in a supplemental budget request for an emergency, such as defense spending for Iraq or the emergency spending for Tsunami relief. But amid growing budget pressures, future debt relief cases are unlikely to be able to take advantage of these vehicles.
The United States and the Paris Club are likely to confront this US funding problem head on when a country from sub-Saharan Africa comes to the Paris Club for debt relief, whether that’s one of the three remaining HIPC Initiative countries—Sudan, Somalia, and Eritrea—or a country currently in debt distress such as Zimbabwe.
A potential nightmare scenario
In the summer of 2018, the IMF and the Government of Somalia agree on a staff-monitored program (SMP) that meets the standards needed for HIPC debt relief. Somalia fulfills the SMP requirements and requests an IMF funded program in 2019. So, in July of 2019, the IMF requests financing assurances from Paris Club members, at which point the United States refuses to provide assurances—due to the absence of authority and lack of funding—and stops Somalia from receiving debt relief despite support from every other creditor. Condemnation of the US position begins.
What can be done to prevent this nightmare scenario? I offer three potential options:
In the FY 2019 budget, Congress should re-institute language authorizing a transfer of resources from State Department to Treasury to cover the cost of bilateral debt relief. While the Treasury Department has been the US agency that has traditionally had to include the appropriation for debt relief in its budget, it makes more sense for State Department to take on this role, particularly given that Treasury has almost $2 billion USD in unmet commitments to the multilateral development banks.
Like many states have done to protect themselves from unforeseen emergencies, the executive branch should work with Congress to establish a “rainy day” fund that can be tapped when needed to cover the cost of bilateral debt relief. Congressional oversight could proceed by subjecting its use to a rigorous congressional notification process.
The executive branch and Congress should work to secure an understanding that the loans extended to countries before the Federal Credit Reform Act went into effect and which have not been serviced in decades are “uncollectible” and that no authorization and/or appropriation is required for the United States to participate in a Paris Club debt treatment agreement (the legal basis for doing this is subject to interpretation).
In the absence of one of these three options or some other creative means to address the lack of funding for bilateral debt relief, the United States will find itself in the position of preventing some of the poorest countries in the world from normalizing their relations with the international financial community—stifling their access to support for critical development needs. The administration and Congress can work in concert to avoid this truly untenable position, but if they fail, the United States may no longer be welcome in Paris.
The Trump administration delivered its FY 2019 budget request to Capitol Hill this week. Containing deep cuts to the international affairs budget, it looks a lot like a repeat of the FY 2018 request. And with a 30 percent reduction in topline spending, few programs were spared. Meanwhile, buried among the rubble are smart reform ideas that run the risk of being overshadowed—or even undermined—by the depth of the proposed spending reductions.
*At the time of posting, the federal government is still operating under a continuing resolution—so this post cites figures included in the draft appropriations produced by the House and Senate. These bills were crafted well in advance of the recent two-year budget deal, and in the case of the Senate have only made it as far as Committee approval.
Congress will need to complete work on appropriations for the current fiscal year before turning their attention to FY 2019. Last week’s two-year budget deal forestalls the immediate threat of sequestration, but the fight over how additional nondefense dollars are allocated could be bruising. Meanwhile an agreement to curb nondefense overseas contingency operations (OCO) spending—on which State and Foreign Operations appropriations have grown reliant—will limit the ability of appropriators to operate outside of imposed budget caps.
Rather than rehash all of the arguments from last year, here’s an update on a few select accounts.
If realized, the administration’s budget request would mark the lowest US contribution to the multilateral development banks in 30 years (after adjusting for inflation). My colleague Scott Morris provides context for this worrying trend and explains what’s at stake if the United States continues to turn away from multilateral engagement.
Bilateral Economic Assistance
Economic Support Fund
Economic Support and Development Assistance Fund
Despite a poor reception last year, the administration revived its proposal to merge the Economic Support Fund and Development Assistance accounts—a move some suggest exhibits the administration’s drive to prioritize diplomatic and political goals over development objectives. Even more concerning, the total provided for the new account, which is also intended to incorporate the smaller Democracy Fund and Assistance for Europe, Eurasia, and Central Asia, is nearly 43 percent lower than what was enacted in FY 2017.
Global Health Programs
Global Health Programs - USAID
Global Health Programs - State
The budget request again proposes cuts to ever-popular US global health programs. But after zeroing out funding for family planning and reproductive health in the FY 2018 request, the administration included $302 million this go around. For a second year, the administration also recommended using remaining emergency Ebola funding ($72.5 million) to invest in global health security.
On a more positive note, the president’s budget request proposes creation of a development finance institution that would consolidate functions of the Overseas Private Investment Corporation (OPIC) and USAID’s Development Credit Authority. My colleagues Todd Moss and Ben Leo drew up a blueprint for just such an institution—and their ambitious plans for strengthening US development finance tools date back further.
The DFI proposal is an about-face from last year, when the president’s request included plans to wind down OPIC’s operations. To see the administration chart a more productive course is a promising evolution. We’re looking forward to the introduction of forthcoming legislation that may give this smart reform idea real legs.
International Disaster Assistance
International Disaster Assistance
Food for Peace II
The request would eliminate funding for the Food for Peace program in favor of more flexible food aid supported through International Disaster Assistance (IDA), which could yield gains in efficiency. But—in another aggravating rerun—the administration suggests this change without providing sufficient resources to meet growing global need. The US system for delivering international food aid is in desperate need of an overhaul, but the solution is to work with long-time reform champions in Congress to provide a permanent fix, not to toss a half-hearted proposal into the annual budget request.
Want to read up on the Trump administration’s FY 2019 budget? You can find all the primary budget request documents here. But for greater detail on what it could mean for foreign aid—and an easier read—check out the congressional budget justifications (CBJs): State & Foreign Operations, MCC, Treasury International Programs. The administration also released an addendum, drafted following the two-year budget deal reached by Congress last Friday, which includes $1.5 billion in additional spending and uses the remainder of an increased allocation to shift funding designated as OCO to the base budget. (This updated table reflects the changes included in the addendum.)
Reforms at Risk?
The State and Foreign Operations CBJ—which accompanied the president’s request—includes six pages outlining USAID’s internal efforts to improve the effectiveness and efficiency of the agency in delivering its mission. CGD experts have weighed in on several aspects of USAID’s “redesign,” starting with a policy brief full of practical recommendations authored by Jeremy Konyndyk and Cindy Huang.
The latest details suggest the agency is moving in some encouraging directions—advancing a plan to merge the Office of Food for Peace and the Office of US Foreign Disaster Assistance, and demonstrating a willingness to tackle procurement reform. The document also highlights USAID’s renewed emphasis on supporting a country’s “journey to self-reliance” with the ultimate goal of transitioning countries, as they demonstrate sufficient commitment and capacity, away from traditional aid to new forms of partnership. To the extent this endeavor encourages greater country ownership and better use of an array of US government tools and approaches—development finance and technical assistance aimed at domestic resource mobilization look to be favorites—it could be a good move. But while OMB clearly gave the greenlight to include the agency’s redesign objectives in the materials submitted to Congress, the budget request itself threatens to undermine even USAID’s best efforts to pursue reform.
That’s not just because sufficient resources will be important to carrying out reforms. There is also a real risk (as Scott Morris warned last year) that large—and seemingly indiscriminate—budget cuts provoke skepticism that any proposed reforms are anything more than budget driven. It can be hard to reconcile such a de-prioritization of foreign assistance with honest attempts to make it more efficient and effective.
Demonstrating an understanding of the value proposition that underpins US development and humanitarian assistance would go a long way to securing needed support from Capitol Hill. Instead, this budget request suggests the administration remains out of step with Congress, which has typically lent bipartisan backing to a wide range of development and humanitarian objectives.
This could make USAID’s job particularly challenging as the agency seeks to reorient country partnerships. Among the lessons learned from past country transitions, chronicled in a CGD policy paper published late last year, is that successful transitions require support from Congress and other stakeholders. If the Hill is left questioning the administration’s commitment to foreign assistance writ large, members may also question the motives behind transition. What’s more, where supporting countries on their “journey to self-reliance” requires USAID to respond more flexibly to country needs, demands, and opportunities, the agency may find limited receptivity. A complex web of congressional spending directives currently leaves precious little flexibility in US foreign aid spending—limiting opportunities to respond to evidence of demonstrated program success or to vest increased decision-making authority in partner country governments. In the wake of a second budget request that leaves stakeholders reeling, appropriators would seem unlikely to loosen the reins.