Few Hits and Many Misses for Development in the FY22 US Spending Package

Nearly six months into the fiscal year, Congress finally delivered an FY22 spending bill last week. But even after stalled negotiations prompted worries that lawmakers would be unable to reach a deal at all, the final measure is something of a disappointment—failing to deliver sufficient resources to address several pressing US development and humanitarian priorities. Undoubtedly the biggest upset came when lawmakers struck new COVID-19 response money from the bill to secure timely passage. (This felt like adding insult to injury since even the funding initially included in the package to fight the pandemic abroad fell well short of anticipated needs.)

While we’re crossing our fingers that Capitol Hill will manage an agreement to provide additional resources to combat COVID-19 at home and abroad, we thought we’d provide a rundown on a few components of the international affairs division (K) of the spending bill—lamenting shortfalls and missed opportunities while highlighting a few wins. The text of the full spending package can be found here, the joint explanatory statement for Division K here.

No new money to combat COVID

Earlier this month, the White House asked Congress for $5 billion to continue pandemic response efforts around the world. Officials outlined the need for resources to achieve near and medium-term ambitions in global vaccine delivery and extending access to critical medical supplies—including therapeutics, diagnostics, and personal protective equipment—while also meeting urgent pandemic-related humanitarian needs. The request represented only a fraction of what advocates and some lawmakers had hoped—and fell short of reported agency needs. Still, Capitol Hill had appeared poised to deliver on both domestic and global emergency COVID-19 spending until late-breaking dissent emerged over the decision to pay-for new spending by recapturing unused COVID-19 funds that had been allocated to states and localities. Facing a pressing deadline, House leadership decided to advance the package without COVID-19 funding.

But even as President Biden signed the omnibus bill into law this week, the administration continues to make the case for more resources to manage the pandemic at home and surge response efforts overseas. A recent White House fact sheet spells out the urgent need for further resources. In the absence of new funding, USAID will have to draw down its work to get shots in arms. House leaders have stated they’re committed to bringing supplemental spending legislation to the floor—with House Speaker Nancy Pelosi (D-CA) voicing support for a much larger topline figure—and are looking into new options to offset the spending.

As it stands, lawmakers’ inability to secure additional funds—even as vaccination rates remain exceedingly low in many parts of the world, threatening lives and increasing the risk of new emergent variants—is a monumental failure and outrageously short-sighted. Congress needs to come to an agreement on the lifesaving money as soon as possible.

Cuts to humanitarian money, even as global crises unfold

One of the most alarming elements of the spending bill is its shortchanging of critical humanitarian accounts. The president’s initial budget request, submitted to Congress in early June, proposed increased funding for USAID’s International Disaster Assistance and the State Department’s Migration and Refugee Assistance, but the omnibus includes cuts to both when compared to recent years. While a portion of the supplemental spending for Ukraine will be used for humanitarian support—and a share of emergency aid passed by Congress last year was dedicated to the resettlement of Afghans—the need for life-saving support around the world is unprecedented.

Table 1: Congress provided significantly less regular funding for major humanitarian accounts relative to prior years (USD million)

*Excluding supplemental money in FY20 provided for international COVID response

The United States has long been the leading provider of humanitarian assistance. Faced with a growing number of protracted crises alongside new and emerging conflicts—situations exacerbated by the pandemic and the effects of climate change—now is the time to step up, not pull back.

Standard support for the IFIs—but Congress swerved on SDR lending

While the measure includes funding to deliver on current pledges and capital commitments to key multilateral development banks (MDBs) and funds, it ignored the administration’s request to pay down a portion of US arrears to the World Bank’s International Development Association (IDA). As we pointed out when the budget request was released last June, total US unmet commitments to international financial institutions (IFIs) have been growing. And with the MDBs ramping up financing to support pandemic response and economic recovery, this was a particularly opportune time to make good on outstanding commitments. It also would have been a chance to ramp up MDB financing ahead of next year, when the US will need to make a double payment to the World Bank’s concessional window. Owing to an early pandemic-focused IDA replenishment, in FY2023, the United States will likely need to provide both the third (and final) installment of its pledge under IDA19 and its first payment toward fulfilling its IDA20 commitment made in December. 

Appropriators included a contribution to an IMF facility supporting lower-income countries, but rejected the administration’s request for authorization to lend US Special Drawing Rights (SDRs) which could have provided a far more robust contribution. When the equivalent of $650 million in SDRs was approved at the IMF last year, the pitch centered on providing critical resources to lower income countries amid an unfolding economic crisis. But by design, a general SDR allocation is distributed in proportion to IMF shareholding—meaning countries like the United States received the lion’s share. From the start, the hope had been that wealthier countries would find ways to reallocate SDRs to countries with greater need. This was always going to be complicated, but the absence of the authorization requested by Treasury is likely to stall this effort further—both for the United States and potentially for other donors looking to follow its lead.

Appropriators also rejected the administration’s $1.25 billion request to deliver on its commitment to the Green Climate Fund and slashed the administration’s contribution to the Clean Technology Fund—one of two Climate Investment Funds at the World Bank. The latter was a key climate priority for Secretary Yellen, highlighted in recent statements at the World Bank and G20.

MCC sees a recission 

Though the bill provides $912 million for the Millennium Challenge Corporation—level funding compared to last year—it would also rescind $515 million in unobligated money previously appropriated to the agency. Admittedly, this “miss” can’t be pinned solely on lawmakers, since the administration was the one to propose the recission in its budget request. A substantial portion of the rescinded funds had been intended for a compact with Sri Lanka that never came to fruition. But though there would seem to be some justification for reclaiming this particular unspent investment, our colleague Sarah Rose pointed out last fall that the move could create a perverse incentive. MCC’s willingness to pause or pull the plug on compacts when problems arise with a partner country has long been central to the agency’s model. The decision to rescind such a substantial sum rather than allowing MCC to put at least some of the additional resources into its other programming—including helping to finance limited compact extensions that Congress authorized in light of pandemic delays—raises the concern that MCC leadership might be less likely to cancel unsuccessful partnerships if they perceive a threat of future budget volatility.

Congressional consensus on aid to Ukraine

While COVID supplemental funding was stripped from the package, lawmakers delivered over and above the president’s request for supplemental assistance for Ukraine across military and humanitarian assistance accounts. It was encouraging to see Capitol Hill reach consensus on at least one urgent request. And there’s little doubt the situation on the ground warrants great attention and resources. We’ll be watching to see how the US works to support the large number of Ukrainians displaced by the current conflict. Our colleagues have pointed to the potential for the Global Concessional Financing Facility, a World Bank trust fund that provides financing to countries hosting large refugee populations, to bolster response efforts. In accompanying materials, House appropriators emphasized that the Economic Support Funds including in the Ukraine supplemental (Division N) can be used flexibly, and referenced macroeconomic needs and the needs of neighboring countries. The administration should consider further support for the GCFF to bolster the regional response.

Table 2: Ukraine Supplemental (Division N of the FY22 omnibus, USD million)

Signs of support for locally-led development?

Lawmakers boosted USAID operating expenses compared to recent years. The additional money comes as USAID Administrator Samantha Power has prioritized agency plans to put local actors in the driver seat and diversify USAID’s partner base.

Power has committed to a target of 25 percent of USAID assistance going to local partners over the next four years, some of which will need to be through small, direct awards that require significant staff time to manage effectively. New resources to hire more staff will, in the long term, contribute to the administration’s broader vision of USAID as nimble and responsive to local needs. Language accompanying the bill notes that the agency “lacks sufficient personnel to adequately respond to many urgent and compelling needs around the world,” and expresses congressional intent that the additional funding is to be used to hire new Foreign and Civil Service Officers. Increased bandwidth can help the agency bolster its collaboration with local actors and meet emerging development challenges.

And in a clear signal of support for the localization agenda, appropriators included a $100 million set aside to promote locally-led development in Central America. In November USAID launched an initiative, Centroamérica Local, to offer $300 million in support over five years to local actors addressing the root causes of irregular migration from El Salvador, Honduras, and Guatemala. As the agency moves forward with the initiative, we hope to see a commitment to evidence-based approaches and evaluating what works in local contexts—including a broader commitment to expanding legal pathways for migration.

Crucially, the spending directive for locally-led development in Central America would allow for up to 15 percent of funds to be spend on administrative expenses and oversight—which are expected to be higher as the agency seeks to partner with a growing number of new partners. But the bill doesn’t envision the extended timeframe made possible by the five-year money included in the Senate draft.

A boost for global health security at a critical moment

Table 3: Within USAID’s global health programs account, the allocation for global health security in regular appropriations has increased (USD million)

Despite failing to include new funding to combat the current global pandemic (see above), the experience of the past two years seems to have provided the impetus for further investment in international readiness to face future global health threats. While shy of the president’s request, the bill provides $700 million for Global Health Security through USAID’s Global Health Programs account. The joint explanatory statement suggests appropriators may be looking for more detail from the administration on plans for future global health security spending, including “possible contributions to multilateral mechanisms.” Presumably this refers to the administration’s efforts to stand up a new financial intermediary fund at the World Bank that would help incentivize countries to address critical preparedness gaps. Sadly, our collective memory is often short—now is the time for the US not only to deliver a down payment on global pandemic preparedness, but to lay the groundwork for sustained investment that will ensure the world is better equipped to fend off the next pandemic.

More resources for the newest US development agency, DFC

Table 4: The bill provides major bumps for both DFC’s administrative expenses and program account

*This total does not include the increased funding for DFC proposed by the administration in the context of a request for CR anomalies unveiled in September.

Since it opened its doors, the US International Development Finance Corporation (DFC) has been tapped to tackle all manner of foreign policy priorities: deliver on global climate finance, counter China’s overseas lending, advance global health and support economic recovery from the pandemic—all while addressing gender inequality. It was encouraging to see a bump in resources for the young agency to help it meet—seemingly boundless—expectations. Our colleagues often noted that DFC’s predecessor OPIC was an (unnecessarily) lean agency. Continuing to hire new staff will be important as DFC grows its portfolio—particularly to ensure it can deliver on its development mandate. Given the apparent bipartisan support for a well-resourced DFC, we’re hopeful that lawmakers will also move forward with a proposal to fix the agency’s equity scoring mechanism—a proposal included in the House-passed competitiveness package being negotiated alongside the Senate version now.

Growing interest in innovation?

Appropriators displayed some optimism about the potential for innovation to address development challenges by maintaining a $30 million spending directive for USAID’s Development Innovation Ventures (DIV). Back in mid-2017, DIV’s future looked uncertain. In the absence of dedicated funding, the program was forced to suspend new applications. But Congress included a funding allocation in the next year’s spending deal that enabled DIV to re-open. Though a relatively small program, lawmakers have good reason to back DIV. Research has shown DIV’s early portfolio delivered an incredible social rate of return per aid dollar invested.

Language in the measure’s explanatory statement directing the USAID Administrator to develop and submit a multi-year strategy on global health research and development, including plans on coordinating with other federal agencies on innovative product development, also caught our attention. CGD has a long history of work on the potential for pull financing mechanisms—including the Advanced Market Commitment—that incentivize private actors to bring socially beneficial innovations to market. Such mechanisms have shown the potential to drive innovation and can be harnesses to deliver significant development benefits—particularly in the health sector. The US government faces some obstacles to offering or engaging in pull financing mechanisms, but they’re surmountable. Faced with a relatively stagnant topline budget, US development agencies should explore opportunities to work with the private sector to finance and support the scaling of innovative ideas shown to work. A new emphasis in this area from USAID could also complement the work of authorizers on Capitol Hill seeking to bolster domestic health R&D and leave us better prepared equipped to tackle health challenges in the future.

Thanks to Sarah Rose and Scott Morris for their input on an earlier draft.