The African Development Bank (AfDB) has announced the approval of a $20 billion financial stability fund aimed at safeguarding economies across the continent from potential debt crises. The initiative, known as the African Financial Stability Mechanism (AFSM), is designed to provide a regional financial cushion similar to those in Europe and Asia.

The AFSM will secure its own credit rating to enable borrowing from international capital markets, with the AfDB serving as its host institution. Plans for the fund were first proposed in February 2022, and the bank is now working on drafting a formal agreement and securing ratifications from participating countries.

The move comes as many African economies face increasing debt repayments, sluggish government revenues, rising public expenditure pressures, and climate-related financial strains. The AFSM is expected to help reduce borrowing costs and stabilize economies before debt issues escalate.

"If implemented as designed, the AFSM can save African sovereigns approximately $20 billion in debt servicing costs by 2035," said Kevin Urama, an AfDB vice president and chief economist.

Membership in the fund will be voluntary and open to any African Union member state willing to participate. Additionally, provisions allow for at least 20% of the membership to consist of non-African states, provided that African nations retain the majority stake.

With some countries already struggling with rising debt concerns, the fund aims to offer concessional loans tied to macroeconomic and fiscal reforms. The AfDB emphasized that the AFSM’s mandate is not to bail out nations but to act as a preventive mechanism to ensure financial stability.