How the Suspension of USAID and Reduced Bilateral Funding Are Reshaping Global Development
The recent suspension of USAID funding has sent shockwaves through the global development sector. While this decision is part of a broader trend of declining international aid, its consequences are being felt immediately in many regions reliant on such funding. This shift is also part of a larger pattern of financial flows from the Global North to the Global South, with other bilateral government funders also changing policy in the last year.
At Kuja, we believe it is essential to take a deeper look at these changes. This article aims to provide a clear overview of the USAID suspension, explaining its implications for funding, the affected communities, and the potential alternatives.
How Bilateral Funding Works
Bilateral funding refers to financial assistance provided directly from one country’s government to another. These funds typically support development projects, humanitarian aid, or economic assistance. In the case of USAID, funding flows through various channels, including direct government-to-government transfers, partnerships with international NGOs (INGOs), and grants to local organizations. However, these financial flows are often constrained by inefficiencies, risk-averse policies, and conditions that limit local agency in decision-making (ICVA).
USAID: A Brief History and the Recent Suspension
Established in 1961 by President John F. Kennedy, the United States Agency for International Development was designed to coordinate U.S. foreign aid programs. Over the decades, it has become one of the largest sources of humanitarian and development assistance, with a budget of approximately $43 billion in 2024.
However, in February 2025, the Trump administration issued an executive order suspending most USAID-funded projects for a 90-day review. This decision, framed as a reassessment of aid efficiency, has led to the immediate halt of critical programs in multiple countries. Organizations working in health, food security, and conflict prevention have reported sudden funding cuts, with devastating consequences for communities on the ground (The New Humanitarian).
The Role of USAID in Global Aid and Other Major Donors
Before this freeze, USAID accounted for about 40% of global humanitarian aid. Other major donors include:
- European Union: The EU has historically been a significant donor, but it is also facing pressure to reduce foreign aid commitments.
- OECD-DAC Countries: Nations such as the UK, Germany, and France contribute substantial funding, though their aid budgets have been shrinking in recent years.
- Philanthropic Foundations: While not government donors, entities like the Gates Foundation and Open Society Foundations play an increasing role in filling aid gaps.
The decline in traditional bilateral aid raises the question: How will affected regions, governments, and organizations adapt to this shifting landscape?
Longstanding Criticism of Bilateral Aid
For years, critics have pointed out the inefficiencies and inequities of international aid. Many argue that traditional aid structures are overly bureaucratic, donor-driven, and often reinforce dependencies rather than fostering sustainable development. The #ShiftThePower movement and localization advocates have highlighted that less than 2% of total foreign aid reaches local organizations directly, while the majority is absorbed by intermediaries—contractors, INGOs, and administrative overheads (Global Fund Community Foundations).
Furthermore, the Grand Bargain, launched in 2016 to increase direct funding to local actors, has largely failed to meet its targets. As of 2023, USAID’s own localization goal of directing 25% of funds to local organizations had actually declined from 10.2% to 9.6% (USAID Localization Progress Report, 2023).
Immediate and Medium-Term Impacts
Short-Term Impacts: The immediate consequences of USAID's funding suspension are being felt most acutely in regions with fragile political and economic systems, where humanitarian aid plays a critical role in maintaining stability and basic services. Countries facing ongoing conflict, food insecurity, and public health crises are among the hardest hit, as the loss of funding disrupts essential programs.
Some examples:
- In Haiti, the suspension of USAID funding has halted security initiatives meant to counter gang violence, exacerbating instability (Reuters).
- In Somalia, food distribution and vaccination programs have been interrupted, increasing the risk of famine and disease outbreaks.
- Across multiple countries, gender-based violence (GBV) services, education programs, and livelihood initiatives have been abruptly shut down (ICVA Report).
Medium-Term Impacts:
- Countries reliant on USAID-supported healthcare and education services may see declining public health indicators, increased mortality rates, and setbacks in literacy and job readiness.
- INGOs and national organizations that depended on USAID grants will need to find alternative funding sources or significantly scale back their operations.
- The decline of Western aid could lead to an increase in financial and political influence from non-traditional donors such as China and Russia (The Guardian).
What This Means for Localization and Non-USAID Funded Organizations
For organizations that do not directly receive USAID funding, the current aid crisis still presents significant challenges. As the overall pool of available funding shrinks, competition for grants from other bilateral and philanthropic sources will intensify. Moreover, the reduction in INGO funding may have ripple effects on sub-grantees and partner organizations that indirectly relied on USAID-backed programs.
The localization movement sees this moment as both a challenge and an opportunity. While the withdrawal of traditional aid threatens essential services, it also underscores the urgent need for community-led financing models, innovative funding mechanisms, and new approaches to development that prioritize local agency over foreign-driven interventions (Alliance Magazine).
What’s Next for Global Aid?
The decline of USAID and other bilateral funding sources signals a major shift in the global development landscape. While aid has long been criticized for its inefficiencies, the abrupt nature of this funding freeze is creating immediate harm for millions of vulnerable people.
Moving forward, it is essential to:
- Advocate for localized funding models that prioritize direct investment in community-led initiatives.
- Explore new financing mechanisms, including social enterprises, impact investing, and South-South cooperation.
- Strengthen regional and national funding networks to reduce dependency on external donors.
This moment represents both a crisis and a call to action. The future of aid must be shaped by those directly affected by it, ensuring that global development efforts are truly equitable and sustainable.
This article serves as the first in a series of content exploring the implications of USAID’s defunding, with upcoming pieces delving deeper into localization, alternative funding models, and community-led solutions.