The Pricing and Politics of Bilateral Sovereign Lending

• In Event: Politics of International Finance

Abstract

Many governments engage in official bilateral lending to low and middle income countries, yet we have little systematic evidence regarding the ways in which governments make choices regarding the terms of these loans. Consistent with scholarship on foreign aid as well as with multilateral bank lending, we hypothesize that lending terms – interest rate, maturity, and grace period – evidence creditor governments’ geopolitical as well as development-related preferences. Using loan-level data on bilateral loans to 128 low- and middle-income borrowers from 1990 to 2020, we investigate three potential models of bilateral loan pricing. We find empirical support for a development model, in which creditor governments offer easier access to financing to countries with greater development needs; indeed, this model has become more prominent over time. We also report substantial support for a strategic interest model, in which geopolitical and economic ties are associated with more generous financing conditions. We find less support for a market model, in which bilateral credit is priced on the basis of default risk. We corroborate these findings with separate data on the US’ bilateral loans 1990-2020, which allow us to identify the determinants of loan pricing for different agencies, including the US Export Import Bank, US Agency for International Development and the US Department of Defense. The paper contributes to the growing literature on bilateral lending by shedding light on the terms of these loans and allows for a more comprehensive understanding of the financing options available to borrowing governments.

Authors

• Alexandra Olivia Zeitz, Concordia University

• Layna Mosley, Princeton University