This article was produced with the support of Afreximbank
A panel of bankers, legal luminaries and development experts have reaffirmed that African multilateral financial institutions need the preferred creditor status not as a privilege but as a necessity.
According to Fitch, preferred creditor status is “a widely accepted principle under which MDBs are given priority for repayment of debt in the event of a borrower experiencing financial stress.”
Moderating the panel “Strengthening Institutional Resilience for Africa’s Growth and Prosperity: The Importance of Preferred Creditor Status for Financing African Growth and Prosperity”, at Afreximbank’s Annual Meetings, Anver Versi, editor of African Banker, asked his panelists for their views on the contentious preferred creditor status which has become a talking point since Fitch downgraded Afreximbank’s rating to BBB- from BBB reflecting “higher solvency risk” because of loans owed to it by Ghana, South Sudan and Zambia.
Afreximbank had countered that it would not accept for the loans to be restructured as that would go against the terms of the treaty that set up the bank and which defined its relationship with its sovereign shareholders. According to Afreximbank “the treatment of its loans and other activities is governed by the treaty and not by classifications created outside its framework.”
Professor Olabisi Akinkugbe, Associate Professor of Law and Purdy Crawford Chair in Business Law, was first to respond.
“The preferred creditor status is seen as conferred by recognition….the status is essential to the functioning of these organisations and African multilateral institutions cannot do the developmental work they want to do for Africa if the status is not there.”
In his own comments, Dr. George Elombi, Executive Vice President of Governance, Legal & Corporate Services, at Afreximbank said the “issue of preferred creditor status has not just arisen; it’s always been there but it wasn’t seen as significant because there were just a few players in the arena.”
According to him, the discussion is becoming more pronounced now that African multilateral financial institutions are playing much more significant roles on the continent.
“A small number of African multilaterals have emerged and are making a statement, taking their place and becoming significant and creating anxiety among the established multilaterals and members of the Paris Club,” Dr. Elombi added.
‘Double standards’
The conferment of preferred creditor status on institutions like the World Bank, the IMF and others was described as double standards by another panelist from the African Union.
“It is double standards for Bretton Woods institutions to want to monopolise the preferred creditor status. It is inherent in the establishment of these institutions. They claim that African multilaterals are lending to risky projects but their lending is driven by need in line with the purpose they were established for.”
Dr. Muhammed Sani Abdullahi, Deputy Governor of Economic Policy at the Central Bank of Nigeria, described the discussion as timely and an existential imperative.
“We need to build financial institutions that can withstand shocks and build long term prosperity. Preserving the preferred creditor status is not a privilege but a necessity so they can continue to bring about development for Africa.”
Dr. Elombi insisted that the methodology and premise adopted by Fitch is erroneous and does not take into account the treaty setting up African multilateral finance institutions and their Africa-first mandates.
“Why should Fitch be worried that African governments want to protect their own institutions? We have become very relevant and important to our governments.”
