U.S. Foreign Assistance: USAID Loan Guarantees
Updated July 18, 2017
U.S. Foreign Assistance: USAID Loan Guarantees
The U.S. Agency for International Development (USAID),
limits the amount of DCA-guaranteed loans provided to any
the leading humanitarian and development agency in the
one country in any one fiscal year to $300 million. It further
U.S. government, provides assistance through multiple
restricts total U.S. participation in any year to no more than
mechanisms. Until the early 1980s, a significant portion of
$1.75 billion in lending no matter the portion being
its assistance was provided in the form of concessional
guaranteed.
loans for development purposes, often for purposes of
building economic infrastructure, in much the same way as
Examples of 2016 DCA guarantees include the following:
the World Bank provides loans to developing countries
today. Since then, it has provided almost all assistance on a
Burkina Faso. A guarantee will make $16 million
grant (i.e., gift) basis. But the agency maintains two
available for lending to micro, small, and medium
programs that issue loan guarantees: the Development
enterprises (MSMEs) along the non-cotton agricultural
Credit Authority (DCA) and sovereign loan guarantees.
value chain: producers, agro-processing businesses, and
Both have grown in prominence in recent years.
businesses selling agricultural products.
Development Credit Authority
Kenya. $17 million in loans are expected to be provided to
individuals, MSMEs, service providers and others in the
Although the DCA program was formally launched in
agriculture, renewable energy, and water and sanitation
1999, it has its roots in several predecessor loan guarantee
sectors, all currently lacking adequate sources of financing.
programs with discrete development purposes, including
the Housing Loan Guaranty Program, originating in the
East and South Africa Regions. A guarantee will make
1960s, and the 1990s Micro and Small Enterprise
$50 million available to support lending in the power sector
Development Program. Like those programs, the DCA
for renewable energy generation and natural gas-fired
stimulates private sector lending for development purposes
generation, transmission, and distribution.
by employing the promise of U.S. government repayment
typically of up to half of each loan in case of default. By
Haiti. A guarantee will make $6 million available to
lessening the liability to the lending bank, these partial loan
support building of low- to moderate-income housing.
guarantees encourage banks to make loans for purposes and
for clients that they may have previously avoided as
India. A guarantee will mobilize $9 million to support a
commercially unviable or too risky.
healthcare provider’s early stage development of a primary
care model.
DCA loan guarantees may be used to support any
development purpose in any part of the world. In FY2016,
Table 1. DCA Appropriations
nearly half of DCA guarantees issued by value (47%)
(in $ millions)
promoted activity in energy; 26% focused on agriculture;
9% were multi-sector; 3%, environment; 4%, women; 3%,
FY15
FY16 FY17 FY18 req.
trade; 3%, health; and 2% supported infrastructure. DCA
Program Transfer Ceiling
40
40
50
60
programs have always been prevalent in sub-Saharan
Africa. In FY2016, 51% of the value of DCA guarantee
DCA Administration
8.1
8.1
10.0
9.1
assistance went to sub-Saharan Africa; 25% to Asia; 15% to Annual Portfolio Limit
1,500 1,500
1,750
2,000
Latin America and the Caribbean; 3% in Europe and
Eurasia; and 6% was globally oriented. Often USAID
Source: Foreign Operations Budget Justification Documents.
technical assistance is provided at the mission level to
reinforce the development purpose of the loans.
U.S. Funding for DCA Loan Guarantees
Examples of DCA Loan Guarantees
Each year, in the annual State, Foreign Operations, and
Related Programs (SFOPS) appropriations, Congress
USAID guarantees vary in form. They may support a loan
specifies an amount up to which USAID may transfer funds
or a bond; they may support a loan directly from a specific
from other accounts to support DCA loan guarantee
bank to a specific single borrower or a loan to a borrower
programs. It also directly appropriates funding to support
from a yet unidentified bank. The vast majority of DCA
the administrative costs of the office that both runs the
guarantees are loan portfolio guarantees in which bank
DCA program and administers sovereign loan guarantees.
loans are provided to a range of borrowers in one or
multiple countries to be used for certain purposes. The
The level of program funding required is not the same as
duration of guarantees is defined in each agreement—most
the level of actual lending that takes place as a result of the
range from 5 to 20 years. Current appropriations legislation
guarantees. First, as noted, the United States is usually only
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U.S. Foreign Assistance: USAID Loan Guarantees
guaranteeing half of the proposed loan amount. Second,
sovereign guarantees have been specifically authorized by
under existing budget practices, the only program funding
Congress. For example, the FY2017 SFOPS appropriations
put forward is the so-called subsidy cost, the amount
(§7034 (o)(1) of P.L. 115-31) authorizes loans to Egypt,
calculated that might be required in case of loan default.
Tunisia, Jordan, Ukraine, and Iraq.
The risk of default depends on a range of factors, which
Once Congress has approved the use of a sovereign
may vary by country and sector. USAID calculates the risk
guarantee, an interagency committee meets to structure the
of default and the appropriate subsidy for each guarantee in
guarantee and agree on terms and conditions. That group is
consultation with the Office of Management and Budget
typically coordinated by the State Department, with active
(OMB). The subsidy amount for a particular loan guarantee
participation of USAID, Treasury, and OMB.
is placed in a Treasury-held account that also holds all other
DCA subsidies, and, in case of default, those collective
The purposes and associated conditionality of sovereign
funds are used to back up all the loans as needed. Only
loan guarantees have varied. Guaranties for Israel in 2003
2.4% of the DCA portfolio experienced default between
were intended to aid that country’s then-ailing economy.
1999 and 2015.
Conditions included, among other things, that the funds be
used to refinance its debt, that they not be used for military
With the risk of default low and shared with the lending
purposes or to support activities in the occupied territories,
bank, each U.S. dollar leverages a much larger amount of
and that total guarantees available could be reduced by the
potential lending. So, for instance, $60 million in potential
amount Israel independently spends on settlements in the
loans to a parastatal electric utility in Zambia requires a
occupied territories (in 2003 and 2005, $1 billion of the
$5.5 million subsidy, leveraging nearly $11 for every aid
original $9 billion authorization was deducted as a result).
dollar. In FY2016, $28 million in total subsidies were
Although loan guarantees are available for a defined period,
expected to generate up to $891 million in loans, a 32 to 1
in the case of Israel, their availability ($3.8 billion
ratio.
remaining) has been extended twice, currently to September
2019.
Sovereign Loan Guarantees
Loan guarantees have been provided to Tunisia and Jordan
Under a sovereign loan guarantee, the United States
in the wake of the “Arab Spring” to foster economic and
government takes on the entire risk associated with a
political reform and, in the latter case, to address economic
private bank loan to a sovereign country or support for
dislocations stemming from the Syria refugee crisis. The
issuance of foreign government bonds. Guarantees allow a
Iraq guarantee is meant to address the economic impact of
country to have access to financing from international
low oil prices and the war with the Islamic State.
capital markets at a rate significantly lower than would be
Conditions for all these countries have included adherence
the case without U.S. backing. Often the guarantee is made
to economic reforms.
in association with reforms specified in the loan agreement
made between the United States and the recipient country.
The sovereign loan guarantees provided to Ukraine are
intended to assist the country reach economic and political
Table 2. Sovereign Loan Guarantees Since 2000
stability in the face of challenges from Russia and Russian-
supported separatists as well as to send a signal of U.S.
Ukraine
FY2014
$1 billion
political support. Conditions include adoption of economic
FY2015
$1 billion
and governance reforms. Ukraine has also been required to
FY2016
$1 billion
provide certification that proceeds from guarantees will
Tunisia
FY2012
$485 million
contribute to social spending to help protect the most
vulnerable citizens from the impact of economic
FY2014
$500 million
adjustments.
FY2016
$500 million
Jordan
FY2013
$1.25 billion
As is the case with the DCA, to support the loan or bonds in
case of default—an event made unlikely due to the highly
FY2014
$1 billion
negative consequences that would result to the borrowing
FY2015
$1.5 billion
country—the United States sets aside a subsidy cost in the
Iraq
FY2017
$1 billion
U.S. Treasury using funds appropriated in the SFOPS
legislation, usually from the Economic Support Fund (ESF)
Egypt
FY2005
$1.25 billion
account. The subsidy level is determined on the basis of a
Israel
FY2003
$4.1 billion (drawn on to date
country rating of the estimated risk involved provided by
from $8 billion authorized)
OMB, contract terms, and other loan characteristics. The
Source: USAID.
2015 $1.5 billion guarantee for Jordan required a $185.6
million subsidy; the 2015 $1 billion guarantee for Ukraine
The United States has provided sovereign loan guarantees
required $447 million. No defaults of guaranteed sovereign
to six different countries since 2000: Israel, Egypt, Tunisia,
loans have occurred to date.
Jordan, Iraq, and Ukraine. Although Section 122 of the
Foreign Assistance Act of 1961 (P.L. 87-195) provides
Curt Tarnoff, Specialist in Foreign Affairs
basic authority to the President to provide loans, including
IF10409
the DCA and sovereign loan guarantees, in practice,
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U.S. Foreign Assistance: USAID Loan Guarantees
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