African leaders approve creation of financial stability fund

African leaders have approved the establishment of a continental financial stability fund, the African Development Bank (AfDB) announced. The new facility, known as the African Financial Stability Mechanism (AFSM), aims to mitigate potential debt crises across the continent.

The AFSM will be hosted by the AfDB and will have its own credit rating to enable borrowing from international capital markets, the AfDB said in a statement on Tuesday.

The fund was initially proposed by African leaders in February 2022, and the AfDB was tasked with its preparation. Following the African Union summit in Addis Ababa over the weekend, the AfDB announced plans to draft a formal agreement and secure state ratifications quickly.

The fund was partly motivated by Africa’s lack of a regional financial safety net, unlike Europe and Asia. Many African economies are grappling with high external debt repayments, sluggish government revenues, increased spending demands, and the impacts of climate change.

“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.

Membership will be voluntary and open to any African Union member. Additionally, up to 20% of non-African members will be allowed, provided African states retain the majority.

Some African nations, such as Kenya and Gabon, have issued international Eurobonds in recent years, leading to concerns over debt repayment. Kenya experienced significant currency depreciation in 2023, while Gabon was recently downgraded by Fitch.

The AFSM will offer loans at concessional rates, and beneficiaries will commit to specific macroeconomic and fiscal reforms. The fund’s primary goal is to prevent debt crises rather than provide bailouts.

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

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Credit: Reuters