Jury is out on whether Africa’s financial stability fund will work

Nairobi — Angola will use its chairmanship of the AU this year to advance the creation of a continental financial stabilisation mechanism, its finance minister says, to cushion economies from sliding into a liquidity crisis due to external debt repayments.

Here are some key aspects of the proposed African Financing Stability Mechanism (AFSM): 

Why are African leaders creating the AFSM?

With public debt soaring 170% in the past 15 years to more than $1.8-trillion (R33.36-trillion), the 54-country continent faces heightened external refinancing risks that could morph into a liquidity crisis.

Debt repayments, which the African Development Bank (AfDB) estimates at $10bn (about R185bn) annually between now and 2033, come as the region faces slower economic growth, exchange rate volatility and dwindling aid.

Angola took over the rotating chairmanship of the AU in February, and finance minister Vera Daves de Sousa said on Friday the AFSM would be a priority to galvanise funds from regional institutions to deal with the debt burden.

US President Donald Trump’s tariffs have sparked market turmoil and a sell-off in risky assets, sending borrowing costs higher and potentially limiting market access for smaller, riskier economies — frontier markets — many of which are in Africa. 

How will it work?

The AfDB, the continent’s multilateral development bank, will play a key role though it is unclear whether the mechanism will be hosted within the lender or as a separate entity.

Next steps include establishing a legal treaty to govern the facility, African officials said.

Modelled on the European Stability Mechanism (ESM), the AFSM is designed to save countries in the region about $20bn in debt servicing costs in the next 10 years, the AfDB estimates.

It will exclusively focus on debt refinancing, backers said, avoiding roles assigned to other bodies such as the IMF, which also backstops countries facing balance of payments challenges.

Once up and running, the AFSM will initially provide debt refinancing loans to members, before branching out to primary and secondary purchase of members’ bonds. It will also weigh providing guarantees to members. 

What will its capacity be?

The AFSM hopes for an Aa/AA rating, and to attain it is likely to offer 20% membership to non-African entities such as highly rated foreign governments and multilateral development banks. No African country has a rating of Aa/AA.

Under that scenario, the AFSM would need $3bn in capital, split between debt and equity, to start operations, and then provide members with $5bn for annual refinancing.

Its capital would need to grow to $16bn over the next decade to keep up with members’ refinancing requirements, boosting its capacity to $30bn.

Member countries would pay $236m in the first decade in annual instalments, backers of the initiative said. 

What does it mean for investors?

There has been scepticism around the plan, mainly because many economies in the region, such as Kenya and Angola, have already been struggling with external repayments, raising questions of their financial capacity to bankroll the AFSM.

Senegal and Mozambique are also struggling with debt.

But AFSM backers, including Angola’s De Sousa, say the initiative can tackle debt challenges over the long term.

Countries that tap the facility will have to carry out macroeconomic reforms designed to strengthen their economies in exchange for cash, the AfDB said.

Supporters say the AFSM is not designed to provide bailouts to countries, but to prevent them from happening, while building a foundation for sustainable growth and development.

Reuters