FINANCE

African leaders have taken a major step toward securing the continent’s financial future with the approval of a new financial stability fund designed to prevent debt crises before they spiral out of control.

The African Development Bank (AfDB), which will host the fund, called the African Financial Stability Mechanism (AFSM), announced that it will have its own credit rating, allowing it to raise money from international capital markets. This means African nations struggling with mounting debt repayments may soon have a much-needed financial cushion.

The idea for the fund was first proposed in February 2022, when African leaders called on the AfDB to lay the groundwork for its creation. Following an African Union summit in Ethiopia over the weekend, the AfDB confirmed it is now pushing ahead with finalizing agreements and securing ratifications from member states.

Why This Matters

Many African economies are under serious financial pressure, juggling external commercial debt repayments, sluggish revenue growth, rising government spending, and even the growing impacts of climate change. Yet, unlike Europe and Asia, Africa has never had its own regional financial safety net—until now.

“If implemented as designed, the AFSM can save African sovereigns approximately $20 billion in debt servicing costs by 2035,” said Kevin Urama, AfDB vice president and chief economist, in an interview with Reuters.

How Will It Work?

Membership in the fund will be voluntary, open to any African Union member state that wants to participate. Interestingly, the AfDB has also made provisions for up to 20% of the fund’s membership to come from non-African countries, as long as African nations maintain majority control.

The new fund could be a game-changer for countries like Kenya and Gabon, which have faced investor concerns over their ability to repay international Eurobonds. These concerns led to a sharp depreciation of Kenya’s currency in 2023 and a Fitch rating downgrade for Gabon just last week.

The AFSM will not function as a bailout fund, but rather as a safeguard to help countries avoid debt crises before they escalate.

“The core of AFSM’s mandate is not to support the provision of bailouts to African states but to prevent them,” said AfDB.

Source: Reuters