Africa’s regional multilateral development banks face an uncertain future. The growing possibility of their loans being included in sovereign debt restructuring has sparked a debate over the fundamental nature of their operating models, with potential consequences for the availability and pricing of financing on the continent. John Basquill reports.
Multilateral development banks (MDBs) have long served as a lifeline for debt-distressed African governments. By providing loans to sovereign borrowers at rates well below those available on the commercial market, they act as a catalyst for economic activity in markets most in need.
One of the most common uses for these funds is to facilitate imports or exports of essential goods.
Egypt’s fate in 2024 is a prime example. The country started the year facing the prospect of sovereign default, placing its heavy dependence on food and fuel imports at risk. But it went on to secure US$9.6bn in concessional financing from institutions including the World Bank, African Development Bank and European Union, as well as record levels of foreign direct investment. This prompted an immediate flurry of economic activity and helped keep imports flowing.
Clearly, this kind of lending – high-value support packages to debt-distressed governments – comes with risks. As a result, in cases where sovereign borrowers default on those loans, larger MDBs such as the European Investment Bank or Asian Development
Bank typically benefit from preferential creditor status, giving them a layer of protection if low-cost loans are not repaid.
This arrangement means that during debt restructuring efforts, MDBs effectively jump the queue ahead of commercial creditors, and therefore are far less likely to suffer significant losses. As a result, they can maintain a higher risk appetite and continue lending at lower rates.
But in the case of the African Export-Import Bank (Afreximbank) and Trade & Development Bank (TDB), two smaller MDBs with a regional focus and a slightly different operating model from their larger peers, this arrangement is at the centre of a long-running saga.
In the face of pandemic-era fiscal pressures, the governments of Ghana, Malawi and Zambia sought to restructure sovereign debt, either through the G20’s Common Framework or directly with creditors. Afreximbank and TDB were collectively left exposed to the tune of over US$2bn.
As of late 2024, Afreximbank is owed around US$45mn by Zambia, US$454mn by Malawi and US$750mn by Ghana, according to a report by ODI Global, a UK-headquartered international affairs think tank. TDB is owed US$323mn by Malawi and US$555mn by Zambia.
Both MDBs insist they should benefit from preferential creditor status, in line with established norms, but government officials and other creditors argue otherwise.
One issue is their business model. Although Afreximbank and TDB typically charge lower interest rates than are available from commercial lenders, they are significantly higher than for traditional concessional finance. They also pay dividends to non-sovereign or private shareholders.
Some argue that as a result, they should be treated more like commercial lenders than providers of concessional finance. Felix Nkulukusa, Zambia’s secretary to the treasury, told Reuters in June his government believes Afreximbank should take part in the debt restructuring process, alongside the country’s commercial creditors.
“It’s not a concessional loan,” he said. “It’s a commercial loan.”
The country’s finance minister, Situmbeko Musokotwane, said the previous month that neither Afreximbank nor TDB would be prioritised over commercial lenders, and Bloomberg has since reported that Ghanaian officials have adopted the same stance.
There are nuances within these disputes. In TDB’s case, for example, some of the financing made available to Zambia’s government was in the form of trade finance loans, which are normally exempt from inclusion in restructuring.
However, TDB agreed to extend the repayment period for those loans. Its managing director, Admassu Tadesse, told Bloomberg this decision was an attempt to act “in a constructive way that would help everybody move forward”.
Commercial creditors say the maturity of those loans has now been extended beyond a typical trade finance facility, and so they should be brought into the wider debt restructuring process.
“That is a little harsh on TDB, in my view,” says Chris Humphrey, a senior research associate at ODI specialising in development finance.
But the wider picture is causing growing concerns over the future availability and pricing of MDB loans on the continent.
Credit ratings under threat
For the two MDBs, the outcome of these disputes could have far-reaching ramifications for their respective credit ratings.
Fitch Ratings announced in June it was downgrading Afreximbank to BBB+, the lowest investment grade rating and one notch above junk, after reassessing its credit risk as “high” and its risk management policies as “weak”.
It cited the possibility that the bank’s sovereign loans in Ghana and Zambia could be included in restructuring efforts, which would “put pressure on our assessment of the bank’s policy importance and heighten the risk associated with its strategy”.
Due to this possibility, Fitch said it believes Afreximbank’s non-performing loan ratio should be recorded at 7.1% rather than the 2.3% reported by the MDB.
The following month, Moody’s downgraded Afreximbank’s long-term issuer and senior unsecured ratings from BAA1 to BAA2, and changed the outlook from stable to negative.
It said it now expected loans to Ghana and Zambia to be restructured similarly to commercial creditor losses, posing capital risks, adding that Afreximbank’s funding quality “has eroded due to a less extensive range of funding sources, which we expect to continue”.
In TDB’s case, Fitch revised its rating outlook from stable to negative in September last year, again citing concerns that sovereign debt restructuring “could lead to significant credit losses for the bank”.
For the two MDBs, there are concerns that downgrades could threaten their access to lower-cost funding.
Backers of both lenders include development finance institutions in France, Germany, Italy, Japan and the UK, as well as the Export-Import Bank of China and China Development Bank. TDB also has credit lines from the African Development Bank and World Bank.
“Creditworthiness is a major issue, because these banks rely on investments to then extend their lending, and including them in restructuring makes their loans more risky,” says Zaynab Hoosen, senior Africa analyst at intelligence advisory Pangea-Risk.
“Then, on the shareholder and investment side, they have to borrow at higher rates, so there’s a domino effect this would have on the way they operate,” she tells GTR. “In Africa, there isn’t enough concessional lending, and there aren’t enough institutions that African countries can rely on when they are in debt distress.”
Pricing and availability
Hoosen says she believes Fitch’s downgrade is “concerning”.
“If Afreximbank must pay more to borrow as a result of perceived increased risk, it is likely to pass on higher rates to African sovereign borrowers and could scale back the volume of new loans,” she says.
In the case of TDB’s trade finance loans to the Zambian government, Hoosen adds: “Are they saying that the population should be deprived of those goods because the government was unable to fulfil its debt obligations?
“And in this case, it was the previous government. It’s not even the government that’s in power now.”
For its part, Afreximbank has hit back at Fitch’s decision to downgrade its credit rating. In a statement issued in June, the MDB said the decision “is hinged on the erroneous view” that its establishing treaty “can be violated by the bank without consequences”.
That treaty, which was executed by 53 African states, requires that the MDB not participate in debt restructuring negotiations, it says.
The African Peer Review Mechanism, an arrangement established in 2003 by African Union states to monitor governance performance, also issued a statement saying that treating sovereign exposures as equivalent to commercial loans is “flawed”.
“Doing so reflects a misunderstanding of the governance architecture of African financial institutions and the nature of intra-African development finance,” it says.
“Fitch has misinterpreted the invitation extended by Ghana, South Sudan and Zambia to Afreximbank to discuss the loan repayments as signalling an intention to default and/or to lift the preferred creditor status.”
Even if Afreximbank and TDB are unsuccessful in their efforts to escape restructuring, any prospective losses do not appear to be an existential threat to either institution.
ODI’s Humphrey says MDBs have “dramatically improved” their non-performing loans portfolio over the last 25 years, focusing hard on improving risk management and loan preparation with a view to increasing their access to bond markets and lowering their cost of funding.
“And they’ve been successful in that,” he tells GTR, adding that even if their non-performing sovereign loans are restructured, they would not be written off entirely.
“Even if they were to face some serious losses on these exposures in these three countries, it’s not going to devastate them by any means,” he says. “Looking at the size of these exposures as a share of their overall loan portfolio, it’s not a massive amount. They’re going to be perfectly fine financially.”
Although a ratings downgrade “certainly won’t help”, he says, it’s unlikely to have a substantial impact on their cost of funding, and as a result, a hike in interest rates on future loans is not a given.
The concern, however, is if restructuring sets a precedent for other sovereign debt disputes on the continent.
“There are other countries out there that could conceivably go into sovereign restructuring that might also have taken loans from these institutions, or others like them,” Humphrey says.
TDB’s Taddesse has warned of precisely this outcome, saying that including the MDB in restructuring would set “a dangerous precedent” and ultimately raise financing costs across the continent.
“There’s a lot of weight on that: what does this mean for the bigger trade finance picture?” adds Pangea-Risk’s Hoosen. “It could be a defining moment, especially in Africa.”
Concessional or commercial
This situation raises questions about the fundamental operations of the two MDBs.
Victor Ojeah, legal counsel for the African Legal Support Facility, notes in a June paper for Afronomicslaw that Afreximbank and its peers “operate under hybrid legal mandates, and often blend sovereign and commercial financing models”.
“Their lending terms, though development-oriented, are priced closer to market rates, and their claims to [preferential creditor status], while normatively compelling, lack the benefit of settled global consensus in the prevailing financial architecture.”
For Gabriel Buck, managing director of export finance advisory firm GKB Ventures, preferential creditor status is hard to justify when MDB lending is provided at relatively high rates, or to sovereign borrowers that are not in need of an emergency debt relief programme.
“I firmly believe that it’s justified that MDBs have preferred creditor status when, and only when, they provide concessional loans,” he tells GTR.
“That means loans that meet the International Monetary Fund (IMF) and World Bank definition of concessional finance, which typically means about 20 years tenor and around a 1% all-in cost, or under some sort of debt or emergency relief programme.”
In that context, Buck agrees preferential status helps MDBs enhance their creditworthiness and so lowers their cost of funding, ultimately enabling them to extend finance at more favourable rates.
“But it doesn’t make sense to use that argument when they’re not on-lending on concessional terms, on-lending in a market where export credit agencies (ECAs) are able to provide the financing, or providing support to countries where the commercial market is there,” he says.
In some cases, Buck adds, preferred credit status “can actually make it less attractive for the commercial or ECA market to come in”.
“There is nothing stopping them from relinquishing that status for a particular project, but accepting a lower ranking in terms of payout does not tend to happen,” he says. “Therefore, there is very little co-financing done by the MDBs and the ECAs in the commercial market.”
The way forward
The prospects for creditors approving Afreximbank and TDB’s preferential status appear slim. Reuters reported in April that members of the Paris Club – a grouping of creditor countries involved in sovereign debt negotiations – were insisting their loans would form part of restructuring.
Despite Afreximbank’s argument that its foundational treaty prevents countries from taking that option, lawyer Ojeah points out that preferential status is not enshrined anywhere in international law, but rather has become an accepted norm over time.
Other regional MDBs, such as the Caribbean Development Bank, operate “under similar fundamentals but have not been accorded [preferential creditor status] by the international community”, he says.
“The question then arises: why should African multilateral financial institutions… receive special preferred status when other regional lenders elsewhere do not?”
The IMF sought to address the issue in 2022, circulating a staff paper that set out criteria to establish whether or not MDBs would be eligible for preferential status in any restructuring.
An MDB would have to demonstrate global membership, have a track record of preferential status in previous restructurings, and not have any commercial shareholders. However, the IMF’s board rejected the proposal, meaning disputes are still settled on a case-by-case basis.
ODI’s Humprey believes the staff paper proposal was flawed, as it did not address interest rates. “To me, that’s the central part,” he says.
But Humphrey says an international agreement – whether from the IMF, the World Bank’s Global Sovereign Debt Roundtable or the G20’s Common Framework – is needed “to give some clarity to these MDBs”.
“We should encourage them to lend in ways that are developmental and not commercial, but nonetheless, these are useful development institutions that are growing rapidly,” he says.
For Ojeah, a reassessment of the global financial architecture “remains the long-term imperative”, but suggests an interim solution: the creation of a distinct class of preferential treatment for regional MDBs.
“These institutions would be eligible for limited forms of debt relief, such as time-bound moratoria or payment deferrals, without being subjected to the full restructuring terms applied to commercial creditors,” he suggests.
If carried out in a coordinated and transparent way, this approach “would provide breathing room to both debtor governments and regional lenders, while preserving the integrity of broader debt workouts”.
