The fund, referred to as The African Financial Stability Mechanism (AFSM), will obtain its own credit rating, enabling it to access international capital markets for borrowing, according to a statement from the AfDB, which will serve as the host for this mechanism.
The call for the fund's establishment was made by African leaders in February 2022, who tasked the AfDB with the necessary preparations. Following an African Union summit in Ethiopia over the weekend, the AfDB expressed its intention to swiftly draft a formal agreement and seek ratification from member states.
In addition to rising external commercial repayments and the threat of default, many economies in the region are facing challenges such as increased spending demands, sluggish government revenues, and the impacts of climate change.
The establishment of this facility is also driven by the absence of a regional financial safety net in Africa, unlike the arrangements available in Europe and Asia.
Kevin Urama, an AfDB vice president and chief economist, stated that if the AFSM is implemented as intended, it could save African sovereign nations approximately $20 billion in debt servicing costs by 2035.
Membership in the AFSM will be voluntary and available to any African Union member state that wishes to join. The AfDB also noted that provisions have been made for at least 20% of the membership to include non-African countries, provided that African states maintain a majority.
The AfDB highlights that African nations are currently facing various debt pressures. Countries like Kenya and Gabon have issued international Eurobonds in recent years, raising concerns among investors regarding their repayment capabilities. These worries contributed to a significant depreciation of the Kenyan currency in 2023 and a recent rating downgrade for Gabon by Fitch.
The head of the African Development Bank (AfDB) informed Reuters last month that the AFSM will offer loans at "concessional" rates, with recipients required to adhere to specific macroeconomic and fiscal reforms.
The AfDB emphasized that the primary objective of the AFSM is not to provide bailouts to African nations, but rather to avert the need for such measures.