The global pandemic, combined with multiple economic shocks and increased global interest rates, has intensified debt risks and limited the fiscal space of lower-income and emerging market governments. The Biden administration has recognized the need to address these challenges and compete with China's Belt and Road Initiative by providing direct and concessional support to developing country partner governments. However, current efforts have primarily focused on scaling up private financing channels, leaving partner governments with limited options for direct support. This paper proposes the reimagining of the US Sovereign Loan Guarantee (SLG) program as a means to mitigate debt vulnerabilities and support governments in dire fiscal straits.
This paper begins by reviewing the functions and history of the SLG program, which has been utilized sporadically and primarily as a foreign policy instrument. By examining wider usage of guarantees from a cost-benefit perspective, the paper evaluates the potential value of expanding the SLG program and establishing it on a sustainable and enhanced basis. The analysis indicates that an expanded SLG program, carefully targeted to minimize risk for the US government and maximize benefits for partner governments, could generate significant savings for partner governments while costing the US government less. The model suggests an initial savings ratio of $3.5 billion for partner governments for every $1 billion of cost to the US government, with the potential for further leverage if funding is provided on a revolving basis.
Given the urgent financial needs of developing country governments, the paper argues for the immediate deployment of a reformed and expanded SLG program. In addition to lessening the financial challenges facing partner governments, SLGs provide a uniquely swift, scalable, and efficient instrument to compete with China's global lending activities. The paper concludes by recommending reforms to the governance of the program to formalize its operations, improve risk management, and enable its expanded use in support of US development objectives.
