For decades, the United States has relied almost exclusively on grants to deliver foreign assistance. While grant-based assistance remains essential in the poorest countries and for meeting health and humanitarian needs, grants are poorly suited to financing large-scale infrastructure, where funding needs far exceed grant budgets, and may be less attractive to middle-income countries seeking larger volumes of finance at below-market rates. Amid growing budget pressures, the United States needs a broader toolkit for engagement, and concessional loans could help fill a key gap at a fraction of the cost.
This paper argues that the United States should initiate a concessional sovereign lending pilot of around $5 billion in annual infrastructure lending that is narrowly targeted and carefully designed. Under the program, eligibility would be limited to countries below the World Bank's graduation threshold with investment-grade or near-investment-grade credit ratings and a low risk of debt distress. Borrowers would commit to full debt transparency, and the United States would publish the terms of all its loans. With major shifts in US international assistance already underway, there is an important window of opportunity to revive a financially efficient tool for engaging middle-income partners without worsening debt dynamics or diverting grant resources from the poorest countries.
