Cutting Aid is Still A Big Deal: Why We Should Pay Attention to the FY21 Budget Request

President Trump sent his fourth budget request to Congress last week—once again including steep cuts to foreign aid spending. Capitol Hill appears primed to reject the proposed reductions, but despite the attitude of many lawmakers, the exercise—which marks the start of the FY21 budget season—remains hard to ignore. We dug in to explore key elements of “the 150 account,” also known as the International Affairs Budget, with special attention to the request for international financial institutions.

Read through or click the list below to be taken specific section:

• Economic Support Fund and Development Assistance

• Global health

• Humanitarian assistance

• International financial institutions

• US International Development Finance Corporation (DFC)

• Millennium Challenge Corporation

Economic Support Fund and Development Assistance

Yet again, the administration has proposed merging several bilateral economic assistance accounts, including the Economic Support Fund (ESF), programmed by the State Department to support US political and strategic goals, and Development Assistance (DA), administered by USAID with a distinct development mandate. The administration has suggested this will enable “a more strategic approach” to aid allocation, but Congress has rejected the proposal for a combined account three years running.

There’s nothing to suggest this version will gain traction, particularly since the request pairs consolidation with a more than 20 percent cut in combined funding. And this year’s move seems particularly out of sync with congressional appropriators, who, bucking historic trends, just provided (slightly) more funding for Development Assistance than the Economic Support Fund in the spending measure that passed in December.

By region, sub-Saharan Africa would see the largest cut under the administration’s request (check out the interactive map below to see the proposed funding changes by country), while most countries in the East Asia and Pacific region would see a modest increase, in line with the administration’s Indo-Pacific Strategy. Worth noting: the comparison is with FY19 funding, the latest year for which the country-level breakdown is available.

Global health programs

The Trump administration proposes slashing global health program spending by more than a third, including deeper cuts to the President’s Emergency Plan for AIDS Relief (PEPFAR) than in any of its prior year budgets.

The chart below shows what the proposed cuts would mean for some of the largest recipients of US bilateral development assistance, particularly considering requested reductions in ESF and DA spending.

As for other global health priorities, the administration touted its commitment to Gavi ahead of the Vaccine Alliance’s third replenishment this June, including $290 million for FY21. The level is the same amount appropriated by Congress in FY20, but $50 million more than the president’s request last year.

Amid concerns surrounding the novel coronavirus (now COVID-19) outbreak, the administration requested $90 million for the Global Health Security Agenda, slightly below the $100 million appropriated in FY20, but did include a $25 million contribution to the Emergency Reserve Fund, established by Congress to respond to urgent global health crises.

For a full rundown on how global health fared across the whole budget request check out Kaiser Family Foundation’s helpful summary.

Humanitarian assistance

Again combining cuts with consolidation, the administration proposed establishing an International Humanitarian Assistance account, which would merge USAID’s International Disaster Assistance account and the bulk of the Migration and Refugee Assistance Account (managed by the State Department’s Bureau of Population, Refugees, and Migration)—and leave only a modest set-aside at State for refugee resettlement.

The proposal drew criticism last year, including from my colleague Jeremy Konyndyk, who expressed serious concern about stripping State of its resources, as this could undermine Department’s diplomatic role in addressing the root causes of major emergencies, and undercut its voice in US humanitarian policy.

When you factor in the administration’s decision to (again) zero out the largest international food aid program (P.L. 480 Title II), the result is a combined humanitarian account slashed by more than a third amid unprecedented global crises. The administration seems to recognize this move is likely to be unpopular and attempts to cloud over the reduction in supporting documents, pointing to carryover (only a few months into the fiscal year) and then averaging the request with the funding level from FY20 to make the claim that it will allow the US “to program well above the second highest level ever.” Congress seems unlikely to embrace that fanciful math.

International financial institutions

Over the last three years, the Trump administration has shown only limited support for multilateral assistance, including the international financial institutions. Congress has stepped in to provide additional funding, including for the International Fund and Agricultural Development (IFAD) (after the administration declined to pledge at the fund’s last replenishment), as well as for the Global Environmental Facility (GEF) (over the administration’s protest that sufficient funds had been provided). As the graph below shows, the general downward trend in multilateral funding didn’t start with the Trump administration. Nevertheless, it’s notable that enacted funding levels in FY12 were 40 percent higher than US commitments under the new budget request; although, admittedly, different financing mechanisms make comparing appropriations for the international financial institutions a bit challenging. More on that below.

(This chart is interactive; hover over any item in the legend to see it highlighted or click to remove it from the analysis.)

Replenishments

The concessional windows (those that support lending activities in the poorest countries) of most multilateral development banks (MDBs), and a number of multilateral funds, rely on regular replenishment cycles. Donors assemble during these replenishments and pledge commitments, generally paid out over three to four years.

This budget request reflects the administration’s pledge at the recent replenishment of the World Bank’s concessional financing window, the International Development Association (IDA), including funding to support the first of three payments toward its pledged contribution. Less obviously, it also includes the first installment of the administration’s level pledge to the concessional window of the African Development Bank, known as the African Development Fund (AfDF). That pledge will also be paid out over three years.

Capital increases

Shareholders in the MDBs, including the United States, may also agree collectively to purchase new shares in an institution, providing additional capital to support the MDB’s non-concessional or private sector window. Since these parts of the institution are viewed as more self-sustaining from a financial standpoint, capital increase agreements tend to be sporadic. And because they deal with shares rather than contributions, only a portion of the shareholders’ total commitment must be paid in—usually in equal installments, over several years. (Donors also promise to provide “callable capital”—but only in the extremely unlikely scenario that the institution were to fall in danger of default.)

This budget request includes funding to support the first of eight installments of paid-in capital for the African Development Bank, based on a capital increase agreement approved in October, as well as the second installment of six to fulfill a 2018 capital increase agreement for the World Bank’s International Bank for Reconstruction and Development.

In addition, the administration is again requesting authorizing language for a capital increase at the private-sector arm of the World Bank, the International Finance Corporation (IFC), after the authorization was not included in last year’s spending package. Since the United States isn’t participating in the IFC capital increase, there’s no need to appropriate funds. But because the United States has such a large voting share in the institution, Congress must give the greenlight before the IFC capital increase can move forward.  

Taken together, these financing arrangements mean the International Financial Institutions portion of the budget can appear more volatile than many parts of the “150 account.” From year to year, an institution or fund may appear or disappear, reflecting new commitments or the end of old ones.

Multilateral debt relief

To add another layer of complexity, the United States has developed a bad habit of failing to appropriate (and more recently, to even request) funding to cover another category of commitment to the international financial institutions: support for debt relief for some of the world’s poorest countries.

Launched in 2006, the Multilateral Debt Relief Initiative (MDRI) reflected an agreement between the United States and other creditor countries to support additional multilateral debt relief for countries that participated in the Heavily Indebted Poor Country (HIPC) Initiative. As part of the deal, donors—including the United States—committed to offsetting the cost of debt forgiveness for IDA and the AfDF dollar for dollar. The United States’ share of this effort is estimated to total $7.6 billion for IDA and $1 billion for AfDF, spread out over about 40 years. But the last time Congress appropriated funding for MDRI at either institution was in FY12 (see chart above), and the last time it was included in an administration’s budget request was FY16. As a result, the United States continues to accrue arrears at these institutions—owing about $1.24 billion to IDA for MDRI and $196.7 million to the AfDF. (These are in addition to unmet contributions that have accumulated when the United States has fallen short of fulfilling the pledges it made during past replenishments.)

The Treasury’s congressional budget justification for its international programs explains that these unmet commitments “damage US credibility” and may undermine the institutions’ ability to “deliver on policy goals sought by the United States,” but fails to offer a solution for this outstanding issue.

Bilateral debt relief

On the bright side, the budget request includes $78 million to account for the remainder of the cost of US bilateral debt relief for Somalia as part of HIPC. After a last-minute rush, authorization language and transfer authority to allow an initial payment of $35 million was included in the spending package approved in December. The United States is Somalia’s largest creditor, and this funding is critical to enabling the country’s debt relief and restructuring process to move forward.  

The International Monetary Fund

Finally, the FY21 budget request includes language to extend and increase US participation in the IMF’s New Arrangements to Borrow (NAB). Following in the footsteps of the Obama administration, the Trump administration contends that this participation doesn’t need to be scored because it is an exchange of monetary assets that doesn’t result in budget outlays and therefore doesn’t need to be scored. This assertion has been a contentious issue in the past when the CBO has taken a decidedly different view. Assigning a score to the increase in US participation in the NAB would have ramifications for the broader 150 account, so it’s worth watching to see how this is resolved.

US International Development Finance Corporation (DFC)

DFC enjoys the distinction of being the agency that would receive by far the largest increase in the administration’s FY21 international affairs budget.

The increase in administrative expenses seems well justified given DFC was designed to be a full-service development finance institution with a unique set of authorities, strong development mandate, larger budget cap, and plenty of new reporting requirements. The boost will allow the agency to grow its staff by more than 100, which will be critical to delivering on the vision laid out in the BUILD Act, and help compensate for the agency’s inability to use collected fees to cover certain transaction costs (a flexibility enjoyed by its predecessor, OPIC).

The budget’s inclusion of a nearly three-fold increase in the agency’s program account, on the other hand, could be a tougher sell—even for some strong DFC champions. Certainly, it makes sense that DFC’s program account will need to grow. As the agency looks to expand its portfolio—in tougher markets no less—it will need a larger credit subsidy. Likewise, DFC’s ability to use its modest grant authority to support technical assistance and feasibility studies will depend on having resources available.

But a key factor driving the high program account funding level is the failure to settle on an appropriate method for scoring the agency’s use of its new authority to make direct equity investments. Equity authority is one of the key changes made by the BUILD Act. OPIC’s inability to make minority-share equity investments kept it out of certain deals and limited its ability to structure other deals to maximize efficiency and impact. But the question of how to score equity in the new DFC’s budget has been fraught. Equity investments are undertaken with the goal of achieving positive returns. But rather than using evidence, such as OPIC’s past performance in private equity funds, to inform scoring calculations, the budget request simply assumes equity investments are a total loss.

Instead, if the scoring practice for equity were revised to recognize that the approach involves long-term investments intended to deliver positive returns, while appropriately adjusting for risk, DFC wouldn’t require quite such a large increase to its program account. Not to mention, it would reduce competition for scarce resources between DFC and other key US departments and agencies—USAID, MCC, State, Treasury—which will be called upon to coordinate and collaborate with DFC to enable it to deliver fully on its mission.

Millennium Challenge Corporation

The good news is the budget request includes a modest plus-up for MCC’s administrative expenses. According to the budget justification, it’s been nine years since the agency has received any adjustment to its administrative cap—so, fair enough.

The bad news is the Trump administration still proposes cutting the agency’s overall budget by $105 million. The result would inevitably leave less for programming, all while the agency manages a larger than usual compact development pipeline and looks to develop its first ever regional investment—with concurrent compacts to improve cross-border transport between Benin and Niger.

FY21 budget resources:

• USAID/State CBJ
• Treasury International Programs CBJ
• MCC CBJ
• Department of State and Other International Programs Appendix