At a time when economic statecraft is an increasingly central component of national security and foreign policy, is the US missing an essential tool in its arsenal? For over three decades, American bilateral foreign assistance has been almost entirely in the form of grants. The absence of a broader financing toolkit, particularly bilateral sovereign loans, has limited what the US can accomplish abroad. Meanwhile, with budget pressures likely to intensify, opportunities to leverage limited resources to advance multiple goals could have broad appeal.
In a new policy paper, we propose a pilot US sovereign concessional lending program of roughly $5 billion a year, aimed at a small set of middle-income countries—like Indonesia or the Philippines—with sound macroeconomic fundamentals and strong strategic ties to the US. Focused on infrastructure that matters for both their own economic development and US interests, the proposal wagers that the US can recover a tool it once used well and recalibrate it for a moment when financial statecraft is what many strategic partner countries are asking for. It also offers an opportunity to advance development goals with lower upfront costs.
The history of US sovereign lending
The US once had a sovereign lending program. From the late 1950s through the 1980s, direct loans to sovereign governments were a key feature of US development policy and, by extension, of US foreign policy. The US financed railways in India, dams across Latin America, and economic reform programs stretching from South Korea to Turkey, largely through concessional bilateral lending deployed in service of strategic partnerships. At the high-water mark in the 1960s, loans made up more than half of USAID's entire assistance portfolio. Sovereign lending then started to decrease in the 1970s as global debt crises mounted and aid priorities shifted. The US made its last sovereign loan in 1988.
The landscape the US would be returning to looks quite different from the one it left. China has spent the past decade extending sovereign loans at enormous scale through the Belt and Road Initiative, offering governments financing the US and its allies often could not match—though, at times, with hidden costs and nearly always lacking transparency. Chinese lending has since pulled back sharply, leaving many middle-income countries with large infrastructure needs and fewer options. Grants and private investment alone cannot fill that gap. Nor should the US seek to emulate China’s approach. We propose a concessional financing instrument that is affordable for countries and deployed transparently.
How concessional loans make US dollars go further
The US International Development Finance Corporation (DFC) fills an important role in mobilizing private capital seeking market-rate returns. Still, its model faces real limits, often where strategic financing needs are greatest. Many infrastructure investments, such as major transport corridors, cannot generate the near-term financial returns private investors require and often need a public-sector counterpart on the other side of the table rather than a private sponsor. These projects call for longer tenors and cheaper rates than a market-return mandate allows and require a lender willing to go sovereign-to-sovereign rather than deal-by-deal.
As we show in our paper, a modest appropriation can cover the subsidy cost of a loan and underwrite financing many times larger than the appropriation itself, enabling the US to extend its strategic financing footprint without a corresponding budget expansion. In our paper, we estimate that a $2 billion concessional loan for a country like Indonesia would cost $200 million in subsidy costs. Below-market rates and long repayment horizons give partner governments access to affordable capital investments they cannot otherwise finance on such terms. Because sovereign loans are negotiated government to government rather than routed through intermediaries, they put the US in direct dialogue with policymakers, offering potential leverage and establishing a durable channel of engagement that grants funneled through implementing partners like nongovernmental organizations simply cannot replicate.
A US concessional lending program could be a force multiplier for the investment the US makes in multilateral development banks (MDBs). Bilateral loans could be structured to co-finance key MDB projects directly, stretching scarce US dollars further by combining them with MDB capital. By offering slightly cheaper terms, they could also give middle-income borrowers a reason to direct their own MDB headroom toward the projects the US is already prioritizing, aligning MDB lending even more closely with US strategic objectives.
Next steps for a US concessional sovereign loans pilot
We propose a disciplined pilot, housed at the Millennium Challenge Corporation (MCC), starting with roughly $5 billion in annual lending focused on infrastructure, with concessional terms calibrated to countries’ income levels and debt sustainability. Initial eligibility would be narrow, targeting investment-grade and near-investment-grade countries below the World Bank’s graduation discussion income threshold that have sound macroeconomic frameworks and a demonstrated commitment to debt transparency. Even on generous terms, loans of this kind require only modest appropriation relative to the traditional grant portfolio. Over time, the program could evolve to other areas, including budget support, and expand the country eligibility pool to include slightly riskier candidates. But our aim is to start with a well-targeted, low-risk program that would allow the US to rebuild its internal capacity to administer the instrument.
Finally, this proposal is not a substitute for grants in the world's poorest countries, where development gaps remain substantial and debt sustainability concerns are real. But today’s geopolitics, persistent development financing gaps, and real and growing US budget pressures call for a more robust approach. A $5 billion pilot would let the US test whether it can again put this tool to good use.
