Will Africa's New Financial Stability Fund Overcome the Debt Challenge?

By Duncan Miriri

NAIROBI (Cryptonesia) – Angola plans to utilize its leadership role within the African Union this year to promote the establishment of a continental financial stability mechanism, according to its finance minister. This initiative aims to protect member economies from plunging into a liquidity crisis as a result of external debt payments.

Below are several important features of the suggested African Financial Stabilization Mechanism (AFSM):

WHAT IS THE REASON BEHIND AFRICAN LEADERS ESTABLISHING THE AFSM?

As public debt has surged by 170% over the last 15 years, reaching more than $1.8 trillion, the continent of 54 nations now confronts increased external refinancing risks which might escalate into a liquidity crisis.

Repayments of debt, estimated by the African Development Bank (AfDB) to total around $10 billion each year from now until 2033, coincide with the region experiencing sluggish economic expansion, fluctuating currency values, and diminishing assistance.

In February, Angola assumed the rotational leadership of the African Union, and Finance Minister Vera Daves de Sousa stated on Friday that prioritizing the AFSM would be crucial for mobilizing resources from regional bodies to address the issue of national debts.

This all occurs as U.S. President Donald Trump’s imposition of tariffs triggers market instability and a decline in high-risk investments, leading to increased lending rates and possibly restricting market entry for smaller, more hazardous economies—often referred to as frontier markets—with numerous African nations being part of this group.

HOW WILL IT WORK?

The African Development Bank, which serves as the continent’s multilateral development institution, will have a crucial part to play although it remains uncertain if this mechanism will operate under the auspices of the financial institution itself or as an independent body.

African officials mentioned that the next step involves setting up a legal agreement to manage the facility.

Modeled after the European Stability Mechanism (ESM), the AFSM aims to help countries in the area save approximately $20 billion in debt service expenses over the coming decade, according to the AfDB.

It will solely concentrate on debt restructuring, supporters stated, steering clear of tasks allocated to other entities such as the International Monetary Fund, which similarly assists nations dealing with balance of payment issues.

After becoming operational, the AFSM will first offer debt refinancing loans to its members, then expand to include the primary and secondary purchasing of member bonds. Additionally, it may consider offering guarantees to these members.

WHAT IS GOING TO BE ITS CAPACITY?

The AFSM aims for an Aa/AA rating and plans to achieve this by potentially offering 20 percent ownership to non-African organizations like top-tier foreign governments and international financial institutions. It’s worth noting that no country within Africa currently holds an Aa/AA rating.

In that case, the AFSM would require an initial capital of $3 billion, divided between debt and equity, to initiate operations, followed by providing members with $5 billion annually for ongoing financial support.

To stay aligned with the needs of its members for the next ten years, its capital should increase to $16 billion, which would raise its overall capacity to $30 billion.

Backers of the plan stated that member nations would contribute $236 million over the first ten years through yearly payments.

WHAT IS THE IMPLICATION FOR INVESTORS?

Skepticism surrounds the plan, largely due to the fact that numerous regional economies such as those in Kenya and Angola have already faced challenges with external debt repayment. This has led to doubts about their ability to financially support the AFSM.

Senegal and Mozambique are likewise facing issues with their debts.

However, supporters of the AFSM, such as Angola's de Sousa, argue that this initiative can address debt issues in the long run.

African Development Bank stated that countries utilizing this facility must implement economic reforms aimed at bolstering their financial systems in return for monetary assistance.

Proponents argue that the AFSM is not intended to offer financial rescues to nations, but rather to stop such situations before they occur, all while establishing a groundwork for lasting prosperity and advancement.

(Duncan Miriri reported this story; Additional reporting was provided by Karin Strohecker from Washington D.C.; The editing was done by Aidan Lewis)

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