As US aid falters, development finance trends to watch in 2025

The drama unfolding in the United States as the Trump administration has dismantled the U.S. Agency for International Development, once the largest bilateral aid donor, is sending shock waves across development finance and could put pressure on a system that has for years tried to mobilize more private sector funds to tackle development challenges. Global needs are growing and many countries, not just the U.S., have cut their official development assistance. So some seemingly perennial questions about drawing more private capital are sure to ramp up, but those efforts may also suffer a blow. “Dismantling USAID is going to create significant funding gaps, and it's just going to make it harder for us to mobilize private capital and achieve impact at scale,” said Elizabeth Boggs Davidsen, the CEO of GSG Impact, a global organization focused on growing impact investing, at a Devex event Monday. USAID has long played a key role in building local financial markets, supporting entrepreneurs with business advice or funding, de-risking investments, and helping build impact investing and business ecosystems, she added. Not to mention that the loss of USAID could also escalate instability, Boggs Davidsen said. “USAID often collaborates with development finance institutions like the World Bank, the IFC, the DFC, and regional banks, so the loss of its involvement could actually eliminate coordinated investment strategies in really important frontier markets,” she said, adding that there will be increased pressure on philanthropy but it's unlikely they could fill the void. One potential outcome of the decline of traditional aid funding is that countries will turn even more to their development finance institutions and that attracting more private dollars to development issues will get even more focus, said Samantha Attridge, a principal research fellow at ODI Global. “I think the focus given the scarce kind of resource, and also tight fiscal budgets is this issue about efficient and effective use of capital of multilateral development banks and development finance institutions,” she said. And this pressure is likely going to force innovation, especially on how to use and recycle funding. To that end, these institutions are already starting to shift their approach from an “originate-to-hold” approach — where they retain loans on their books — to an “originate-to-share” strategy that attracts private sector investors. IDB Invest, the Inter-American Development Bank’s private sector arm, launched a securitization deal last year. The International Finance Corporation, the World Bank’s private sector arm, is expected to make its first issuance as part of a new Warehouse Enabled Securitization Program. The African Development Bank is also exploring securitization transactions. “What's really important here is that we don't go down a route where there's fragmentation, where each MDB has its own securitization program, and we should be looking across the system, where you can have multi-originator securitization platforms,” Attridge said. Some of those transactions are designed to establish a development finance asset class within financial markets. A key component of this effort involves defining this asset class and aligning the definitions used by DFIs with those that exist in the private sector, said Arsalan Mahtafar, head of the J.P. Morgan DFI. What is important is “that these definitions are much more harmonized between the official development institutions, the MDBs, and DFIs, the private institutional investors that often need to invest in ways that allow them to report on their sustainable outcomes in line with regulations that are developing primarily driven by European regulators,” he said. De-risking instruments and blended finance — where some concessional funds are used to make a transaction more appealing — are also important components in drawing more private investors in. “I would be a very large advocate for guarantees that are in a way a standard product provided to the market to go and originate opportunities that require that product,” Mahtafar said. However, the scarce resource of concessional capital should be used carefully, Attridge said. “You don’t always need blended finance to mobilize institutional investors.” A lack of data and transparency can also hold back investors, and they are often constrained by macroeconomic factors, including the debt situation in a country. Investors that J.P. Morgan works with look for risk-adjusted returns that meet financial and impact requirements, Mahtafar said. A lack of impact data translates to a lack of credibility. And this will be a big year for development finance. Government officials, advocates, and development finance experts are eagerly awaiting the Fourth International Conference on Financing for Development Forum, which will be held in Seville, Spain, between June 30 and July 3. “There’s a lot of hype about this,” because “the agreements that emerge set the foundation for a lot of international cooperation on financing for development,” Boggs Davidsen said. Issues likely to feature at the event include addressing the debt crisis faced by many countries, new financing models, private finance, concessional finance, climate investments, and reform of the global financial architecture. “We need to think about this enabling environment. I think we know what needs to be done. We know the plumbing works, but there’s other factors which we need to spend more time on.” Attridge said. There is also a need to be realistic and honest about what is actually possible, even as it is an opportunity to harmonize metrics and data. Those may be worthy goals, but making sure the right people are around the table is also important, Mahtafar said, adding that an inevitable outcome is going to be that more private-sector financing is needed. To make that happen, private sector financiers should be part of the discussion, he added.