Correction: Funding reported for the Special Defense Acquisition Fund has been corrected to show it remains steady at $900 million.

WASHINGTON — The White House fiscal 2018 budget request cuts more than $1 billion from the U.S. State Department's Foreign Military Financing program, with the majority of countries fighting over a pot of about $200 million in funding. 

The cuts, first reported by Defense News, come hand in hand with a new push to move FMF funding into a loan program that critics say will drive allied nations to look elsewhere for defense procurement.

Foreign Military Financing has largely taken the role of a grant given to U.S. allies to allow them to buy defense equipment. With the exception of Israel, all countries that receive FMF have to spend it on goods made in the United States, a boost for the domestic defense industry. 

For full FY18 budget coverage, click here. 

FMF comes in both base and overseas contingency operations, or OCO, flavors. Under this budget, the base request would be $4.6 billion, down slightly from $4.7 billion appropriated in FY17. The biggest cut comes from the OCO funding stream, which drops from almost $1.3 billion appropriated for FY17 to just $450 million. In total, FMF drops from $6.1 billion in FY17 to $5.1 billion in this request.

In FY18, Israel continues to receive $3.1 billion, while Egypt is earmarked for $1.3 billion, the same levels they received in FY17. Both Jordan and Pakistan will receive FMF as part of the State Department's OCO account. While Jordan will receive the same $350 million it did in FY17, Pakistan will take a steep cut in support, going from $250 million to $100 million.

Any other nation looking for FMF funding will have to share a pool of $200.1 million, which will come in either the form of traditional FMF or the new loan system — apparently the preference of the government, as the budget documents state that, "where possible and appropriate, the U.S. government will seek to utilize loans."

Just how those loans will work remains unclear. Details were skim in the budget: "loans allow recipients to purchase more American-made defense equipment and related services than they would receive with the same amount of grant funding, partially accounting for the decrease to the account from prior years," the budget document reads — and State has not expanded on how the repayment for loans would work.

The narrative in White House budget materials heavily implies the administration will look to Pentagon Title 10 funds to pick up the slack, which security assistance watchers fear will mark the effective transfer of FMF to the Pentagon.

"It’s the end of FMF as we know it," a congressional aide said. "As for loans, I heard that only a literal handful of the countries cut would even qualify for loans."

As part of the 2017 omnibus spending bill passed by Congress earlier this month, State was required to provide an assessment of the budgetary and diplomatic impacts of transitioning FMF grants to loans. The assessment would have to include "the extent to which such transition would affect the foreign policy interest of the United States," particularly those included in the 2018 budget.

Analysts have said that moving to a loan system, which would presumably require partners to spend the money they receive on U.S. goods before paying the money back to the U.S. government, would cause nations with low budgets to turn instead to Russia or China to buy their defense equipment.

"I have serious doubts about foreign military financing as loans actually working, based on the information I've read; it didn't work in the past," said Colby Goodman, director of the Security Assistance Monitor.

"We've gotten ourselves into it, but a lot of these countries feel entitled to the aid, and now we say: 'No, you have to pay for this now.' It's going to strain [those relationships], it's going to make things difficult."

In news that will cheer industry, funding for the Special Defense Acquisition Fund remains steady at $900 million. The SDAF is used to expedite the process of foreign nations buying American-made goods by preemptively buying long-lead items for expected procurement requests from allies.

Joe Gould in Washington contributed to this report.

Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.

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