Africa’s financial sovereignty is under attack

Written by Carlos Lopez

A growing number of Western media, think tanks and financial commentators are questioning whether Africa’s multilateral financial institutions, such as the African Export-Import Bank (Afreximbank), should maintain their “preferred creditor status.” Their criticisms are not only wrong; These threaten to erode Africa’s growing financial autonomy and undermine its ability to chart an independent economic path.

Preferred creditor status gives multilateral lenders, including the European Investment Bank, the International Monetary Fund, and the World Bank, priority priority and protects the loans they issue from debt restructuring when a sovereign borrower faces financial stress. By providing a financial firewall for development institutions, we ensure the market confidence that is essential for the long-term functioning of these financial institutions.

This is not an arbitrary privilege. It is a codified principle. Preferred creditor status is also essential as it reduces borrowing costs and thereby facilitates the provision of affordable finance to distressed countries.

When Africa established its own multilateral development banks (MDBs), such as Afreximbank and the African Development Bank, it ensured that they enjoyed all the rights and immunities necessary to protect their businesses and autonomy, including priority creditor status. To achieve this objective, African governments have established relevant provisions in their domestic legal systems and international treaties. It was a powerful expression of agency by a continent that has been consistently failed by the global financial system.

African governments have even found ways to leverage MDBs themselves, despite financial constraints. A carefully designed hybrid governance model has allowed us to attract private investors without compromising our development mission. But now some critics are trying to use African resourcefulness to counter that, arguing that a true MDB with priority creditor status cannot include private shareholders.

Some argue that African institutions cannot function as development banks because they face high interest rates in capital markets. However, this strengthens the argument that Africa should have its own MDB. The high cost of capital faced by African borrowers, whether banks or government agencies, does not reflect economic fundamentals, but rather deep-seated biases exacerbated by the pro-cyclical approach of credit rating agencies that lead to downgrades precisely when borrowers are most vulnerable.

In contrast, African MDBs provide countercyclical finance, directing funds to productive sectors and reinvesting profits in subsidies and concessional finance. Afreximbank recently expanded its concessional financing facility from $1 billion to $5 billion on the back of increased shareholder contributions.

If these institutions lose their preferred creditor status, their ability to provide important long-term development financing will be significantly impaired, particularly as they will have to participate in sovereign debt restructurings. While that may sound like solidarity, the reality is that the burden of debt relief is shifted to African MDBs, effectively forcing some African shareholders to subsidize the debt of other shareholders, while global financial institutions hide behind their own preferred creditor status.

International credit rating agencies are increasing the likelihood of such a scenario. Fitch recently lowered Afreximbank’s long-term issuer default rating to BBB- status, and Moody’s lowered the rating from Baa1 to Baa2. Governments already dealing with high interest rates in parts of the world are likely to bear the burden of higher borrowing costs.

Although these rating moves are framed as risk-based decisions, the methodology used is problematic. For example, Fitch penalized Afreximbank for its accounting practices in accordance with International Financial Reporting Standards. It also raised questions about the enforceability of the bank’s preferred creditor status, raising the possibility that it would create a self-fulfilling prophecy.

With the support of the African Peer Review Mechanism, Afreximbank acted quickly to reaffirm that its priority creditor status is non-negotiable. It said forcing the country to participate in a debt restructuring agreement would be “inconsistent with the founding treaty.”

More broadly, the erosion of an African institution’s preferred creditor status would send a signal that the African institution cannot be trusted. That is, its legitimacy will be constantly reassessed by external actors according to imported standards. This will undermine Africa’s ability to build a financial architecture that can support Africa’s own agenda for long-term structural transformation.

One might think that those who challenge Africa’s MDBs’ preferred creditor status do not understand the risks. But that’s probably overly charitable. Indeed, such actors appear to be actively plotting to destabilize these institutions and force Africa to continue operating within a global system in which it is forever a supplicant and never a planner. They want Africa’s development to be shaped not by regional institutions committed to investing in Africa, but by international institutions that emerge only in times of crisis and offer difficult conditions that do not take into account the continent’s needs.

Rather than allowing such actors to unwind decades of efforts to build a financial system that is responsive to Africa’s priorities, the continent’s governments must demonstrate clear support for these institutions. African MDBs derive their strength from their context. Their survival is a matter of concern to the entire continent. It is a political obligation to protect the status of them and their preferred creditors. A piecemeal response will embolden critics. Silence is interpreted as surrender. A unified and principled defense of Africa’s financial sovereignty is the only way forward.

Carlos Lopez is Professor Emeritus at the Nelson Mandela School of Public Governance at the University of Cape Town and a member of the United Nations Development Policy Board.

Copyright: Project Syndicate, 2025.
www.project-syndicate.org

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