African leaders approve financial stability fund to prevent debt crises

The African Development Bank leads efforts to establish the African Financial Stability Mechanism, aiming to curb debt risks across the continent.

African heads of state and delegates attend the opening of the 38th Ordinary Session of the Heads of State and Government of the African Union at the African Union Commission headquarters in Addis Ababa, Ethiopia, on February 15, 2025. Photo by Tiksa Negeri/Reuters

By Clarisa Sendy and Widya Putri

African leaders have approved the creation of the African Financial Stability Mechanism (AFSM), a fund designed to shield the continent from potential debt crises before they escalate. Hosted by the African Development Bank (AfDB), the AFSM will secure its own credit rating, allowing it to borrow from international capital markets. The initiative marks a significant step toward strengthening Africa’s financial resilience, particularly as many countries grapple with external debt repayments, weak revenues, and economic strains.

A major step toward financial stability

The push for the AFSM dates back to February 2022, when African leaders called for the creation of a regional financial buffer. Following an African Union summit in Ethiopia, the AfDB confirmed that it will now accelerate the drafting of a formal agreement and seek ratification from member states. The fund's primary goal is to prevent sovereign defaults and provide financial stability, a function similar to mechanisms already in place in Europe and Asia.

Unlike other regions with established financial safety nets, Africa has long lacked a dedicated facility to manage debt crises. The AFSM aims to fill that gap by offering timely financial support to nations at risk of default.

Debt burdens and economic challenges in Africa

Many African countries face mounting debt challenges due to rising external loan repayments, fiscal pressure, and slow revenue growth. Climate change further exacerbates these difficulties, straining national budgets and increasing the need for emergency financial assistance.

Nations such as Kenya and Gabon have issued international Eurobonds in recent years, but concerns over their repayment capacity have triggered financial instability. In Kenya, fears of default led to a sharp currency depreciation in 2023, while Gabon recently suffered a credit rating downgrade by Fitch Ratings. The AFSM aims to mitigate such financial shocks by offering concessional loans tied to macroeconomic and fiscal reforms.

Potential savings of $20 billion in debt servicing costs

If fully implemented, the AFSM could help African countries save approximately $20 billion in debt servicing costs by 2035, according to AfDB Vice President and Chief Economist Kevin Urama. This substantial reduction in debt expenses could free up financial resources for development initiatives and economic growth.

The AFSM will not function as a bailout fund but will focus on preventing financial crises through proactive interventions. The mechanism’s design ensures that recipient countries commit to economic reforms in exchange for financial support, aligning with broader efforts to promote fiscal discipline and sustainable debt management.

Voluntary membership and international participation

Participation in the AFSM will be voluntary, with all African Union member states eligible to join. The AfDB has also made provisions for non-African countries to hold up to 20% of membership, ensuring African nations retain majority control over the fund.

By securing international backing, the AFSM could enhance its credibility and borrowing capacity, making it a more effective financial stability tool. The initiative reflects Africa’s growing efforts to strengthen its economic independence while maintaining strong ties to global financial markets.

A step toward long-term financial security

The AfDB has positioned the AFSM as a strategic solution to Africa’s recurring debt challenges. While global financial institutions such as the International Monetary Fund (IMF) and the World Bank provide external support, the AFSM will allow African nations to address their financial vulnerabilities with a regionally managed safety net.

With rising debt concerns across the continent, the approval of the AFSM marks a turning point in Africa’s approach to financial stability. The next steps will involve securing commitments from member states and ensuring the fund operates effectively in preventing future economic crises.