By J. Atsu Amegashie
Background: “Ghana and Zambia have snubbed Africa’s leading development bank: why they should change course”
Ghana and Zambia have both taken decisions to relegate Afreximbank to a commercial lender from a preferred creditor. This means that the terms on which Afreximbank has lent money to these two countries will change. And it will lose certain protections. For example, preferred creditors are repaid first, before any other lenders.”
Let me respond to the following comment: “I do not see how Afrexim can lend on non-concessional terms and then claim PCS.”
1. There is a justification for Afrexim’s claim of preferred creditor status (PCS) because lending on concessional terms is not or should not be the only criterion for PCS. That was why your former colleague at the African Development Bank, Ebrima Faal, argued that: “PCS is not symbolic, it’s what enables Afreximbank to keep lending when others retreat. It stepped in during the 2015–2016 commodity crash. It lent over $750M to Ghana and $45M to Zambia during COVID-19. It backs healthcare, food security, and trade, sectors commercial banks avoid.”
So, he gave two other criteria for PCS: (a) lending during a crisis (e.g., commodity crash, Covid-19), and (b) lending to developing countries in sectors like food security and healthcare that commercial banks avoid. These sectors are likely high-risk or low-return sectors (e.g., prices in healthcare in the public sector are low and the demand for healthcare in the private sector of developing countries is low. People cannot afford to pay “high” prices).
2. Giving PCS to the IMF and World Bank is a benefit over and beyond what they already get for giving concessional loans. In return for their concessional loans, the IMF, for example, gets the right to monitor and supervise the borrower and disburses its funds in tranches subject to the borrower meeting its conditionalities (the central bank shouldn’t have forex auctions; get rid of fuel subsidies; increase taxes; cut expenditure; privatize, etc), conducts periodic reviews (staff visits, reports, etc).
The World Bank gives money to countries even when there is no crisis. Examples are budget support and project aid or loans. Project loans are tied to specific projects (e.g., educational programs or a large-scale infrastructure project). Budget support is not necessarily tied to specific projects but it is based on “on a policy dialogue between donors and recipients, and it is disbursed according to compliance with mutually agreed *policy reforms*.”
When a country borrows $3 billion from the eurobond market, it gets the entire amount in one tranche, without any policy conditionalities, periodic reviews (staff visits, reports, etc), etc. Because the loan is disbursed in tranches subject to meeting certain conditionalities, the IMF and the World Bank are able to manage risk better than commercial banks. One may then argue that these institutions do not deserve any additional privilege in the form of PCS.
3. Even if one accepts that the IMF and World Bank deserve PCS, why should they be excluded from debt restructuring regardless of the size of their loans and relative magnitude of their concessional interest rates? Suppose the market interest rate is 10%. Any interest rate below 10% is, by definition, a concessional interest rate. Should a lender be granted full PCS, so long as its interest rate is below 10%? Should 5% deserve the same PCS as 3% or 8%?
Not really. This was why in Diwan et al (2023), they explicitly considered the degree of concessionality of a creditor’s loan. DHK (2023) calculated the grant (or concessional) element of each creditor’s loans. This is “… the difference between the loan’s nominal value (face value) and the sum of the discounted future debt-service payments to be made by the borrower (present value), expressed as a percentage of the loan’s face value.” As they correctly observed, “Whenever the interest rate charged for a loan is lower than the discount rate, the present value of the debt is smaller than its face value, with the difference reflecting the (positive) grant or concessional element of the loan.” As expected, creditors with a higher degree of concessional loans suffer smaller haircuts.
In DHK’s computations, the lowest haircuts are suffered by multilateral development banks (MDBs), followed by bilateral donors like China, and then private creditors (banks, hedge funds, etc). Private creditors incur the largest haircut losses because their loans have the smallest degree of concessionality.
Under the current convention/arrangement, full PCS is granted to the World Bank, the IMF, etc regardless of the degree of concessionality (relative to loans of other creditors). And, in terms of the concessionality of loans, the current debt restructuring arrangement treats all non-MDB lenders as a homogeneous group. But they are not. According to a February 2023 article by Etsehiwot Kebret and Hannah Ryder in The Diplomat:
“An analysis of 157 countries comparing World Bank to Chinese lending in the 2000-2014 period found that while Chinese lending terms were less concessional than those for World Bank projects, Chinese loan terms were more concessional than private sector terms. The authors also found that loans from Chinese institutions tended to be larger than those from the World Bank (the average loan sizes were $307 million and $148 million, respectively), while 30 countries were able to get loans from China but not the World Bank, which may explain the difference in costs.”
4. The PCS should be formalized. When an investor buys shares in a company, s/he knows that the stock is a common stock or a preferred stock. When Ghana and Zambia borrowed money from Afrexim, was it known by all parties that, in the event of a default, Afrexim would have a preferred creditor status (PCS)? According to Misheck Mutize of the University of Cape Town, “Afreximbank’s preferred creditor status is not an informal privilege but derives from Article VX(1) of its founding agreement. The agreement has been signed and ratified by member states into national laws, including Ghana and Zambia.”
Reference
Diwan, I., Harnoys-Vannier, B., and Kessler, M. (2023). IDA in the debt crisis: exploring feasible deals through comparability of treatments and new loans. Finance for Development Lab (Paris School of Economics), Policy Note 6, May 2023.
Kebret, E., and Ryder, H. (2023). China’s debt relief position is actually reasonable. The Diplomat, February 2023 (https://thediplomat.com/2023/02/chinas-debt-relief-position-isactually-reasonable/).
