External borrowing by governments is widely viewed as an important instrument for financing development, yet its growth effects remain controversial. We exploit the bilateral structure of public sector lending relationships to construct plausibly exogenous foreign credit supply shocks, isolating changes in borrowing capacity arising from creditor specific shifts in lending rather than borrower demand. Using data covering 134 developing economies over 1970-2023, we show that positive foreign credit supply shocks lead to persistent increases in public investment and external indebtedness. […]