Debt relief and remittances can offset foreign aid cuts for most countries, but some remain locked out

Abstract

In 2025, bilateral foreign aid was reduced by 23%, affecting more than 130 aid recipient countries. We assess whether debt service relief or remittance increases can match the USD 26 billion in aid losses. Using a network-shock model calibrated to bilateral donors' individual cuts, we estimate recipient-country aid losses and evaluate compensation feasibility in terms of annual debt service payments that would need to be cancelled and remittance capacity (the headroom between flows and a theoretical maximum in which every working-age migrant sends funds) mobilised to financially offset them. We find that 18% external debt service relief and 10% of remittance mobilisation could compensate half of the affected countries. However, some countries remain locked out of either or both mechanisms. A fundamental trade-off in the global financial architecture emerged for large aid-cut losers: countries positioned to benefit from debt service relief lack large international diaspora networks (limiting their capacity to increase remittances), while those with established diaspora channels face structural exclusion of traditional debt markets, rendering debt service relief ineffective. These insights introduce nuance in how alternative finance sources can replace foreign aid.