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Concerns are growing that a dispute over the status of multilateral development banks (MDBs) in African sovereign debt restructuring could impact the availability and pricing of trade finance on the continent. 

MDBs have historically served as a vital source of financing for governments in the Global South, typically providing lower rates than commercial alternatives. In some cases, funds are deployed to facilitate imports or exports of essential goods. 

In instances of sovereign default, larger MDBs like the European Investment Bank or Asian Development Bank are typically considered preferential creditors, meaning they would have priority above commercial lenders when seeking repayment. Trade finance loans are usually excluded from debt restructuring. 

However, two smaller South-focused MDBs – the African Export-Import Bank (Afreximbank) and Trade and Development Bank (TDB) – are currently locked in a row over whether they should be granted preferential status across three African markets. 

The governments of Ghana, Malawi and Zambia are seeking to restructure billions of dollars in public debt, which includes commercial loans and bonds as well as facilities extended by MDBs. 

Afreximbank is owed around US$45mn by Zambia, US$454mn by Malawi and US$750mn by Ghana, according to think tank ODI. TDB is owed US$323mn by Malawi and US$555mn by Zambia. 

Zambia’s finance minister, Situmbeko Musokotwane, said in May that Afreximbank and TDB should not be prioritised over commercial lenders, which he said would be in line with “rules agreed upon with all the creditors”. Bloomberg reported this week that Ghanaian officials have adopted the same stance. 

One point of contention is that the two MDBs charge higher interest rates than institutions like the International Monetary Fund and World Bank, and pay dividends to shareholders, so should not be granted the same protection from potential losses. 

But TDB managing director Admassu Tadesse told Bloomberg this approach would set “a dangerous precedent”, which could result in higher financing costs in Africa. 

 

Cost concerns 

Zaynab Hoosen, senior Africa analyst at intelligence advisory Pangea-Risk, says restructuring Afreximbank and TDB’s debt in line with other creditors could cause their credit ratings to be downgraded, indirectly raising the cost of financing to borrowers in African markets. 

The two MDBs have credit lines with several development finance institutions, including in China, France, Germany, Italy, Japan and the UK. 

“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,” Hoosen tells GTR. 

“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. 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.” 

Samaila Zubairu, chair of the Alliance of African Multilateral Financial Institutions, told Bloomberg this month: “Asking them to take haircuts erodes their capital base and raises their borrowing costs, ultimately making development financing more expensive for Africa as a whole.” 

Chris Humphrey, a senior research associate at ODI, notes that restructuring debts in Ghana, Malawi and Zambia would not necessarily result in a major downgrade of the MDBs’ credit ratings, nor result in major financial losses. 

“They wouldn’t be writing off these loans,” he tells GTR. “They would be restructured in some way, and 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.” 

But Humphrey says including MDBs in the restructuring could have a knock-on effect for debts in other distressed nations. 

“Other governments that are exposed to these banks might be looking closely at this situation, to see how they design their strategy to deal with debt issues,” he says.  

 

Trade finance in the crosshairs 

In the case of Zambia’s debt owed to TDB, a further complication is the treatment of trade finance loans. 

Although trade finance is normally exempt from any restructuring, TDB has extended the repayment period for some loans, with Tadesse seeking repayment “in a constructive way that would help everybody move forward”. 

However, commercial creditors have argued that this extension means those loans should be brought into the wider debt restructuring process, as the maturity has been extended beyond a typical trade finance facility. 

“That is a little harsh on TDB, in my view,” says ODI’s Humphrey.  

Pangea-Risk’s Hoosen notes the outcome of this dispute could set a precedent for other restructuring efforts. 

“There’s a lot of weight on that: what does this mean for the bigger trade finance picture?” she says. “It could be a defining moment, especially in Africa.” 

Hoosen says TDB’s loans to Zambia were extended to ensure the country could continue to import essential goods, and aligning the treatment of trade finance with other commercial lending risks undermining that approach. 

“Are they saying that the population should be deprived of those goods because the government was unable to fulfil its debt obligations?” she says. “And in this case, it was the previous government. It’s not even the government that’s in power now.”