The creation of a finance facility to protect African nations against volatile commodity prices and onerous debt has been announced by the Finance for Development Lab, a Paris-based development-finance think tank.
The African Liquidity and Stability Mechanism was announced at the launch of the think tank on Thursday at an event attended by World Trade Organization Director-General Ngozi Okonjo-Iweala and 2019 Nobel Prize in Economics winner Esther Duflo.
The mechanism will be set up as a trust fund and housed by a pan-African institution with “preferred creditor status,” the lab said in a statement. It will be funded by African countries, the reallocation of special drawing rights from the International Monetary Fund and other capital from external donors.
“The purpose of the ALSM is to shield African sovereigns from external shocks by fostering deeper and more stable local financial markets,” Daniel Cohen, chairman of the lab, said in a statement. In addition it will be tasked with “protecting against commodity price shocks and providing technical and financial assistance to help governments manage external debt burdens.”
The mechanism will oversee a fund that will enable four facilities:
- The United Nations Economic Commission for Africa’s liquidity and sustainability facility, which will improve liquidity and cut state borrowing costs by providing short-term loans in exchange for sovereign debt collateral.
- A commodity hedging facility to protect against price fluctuations by guaranteeing margin calls that are triggered when prices rise.
- A credit enhancement facility to offer rolling interest payment guarantees on existing debt stock.
- A debt restructuring facilitation facility to help initiate debt restructuring negotiations by paying some of the debt to creditors.
The facility is the first policy recommendation made by the lab in collaboration with Egypt’s Economic Research Forum.
The ALSM will only lend to countries that are on a “sustainable fiscal path” and will be overseen by a board of directors representing member countries and international contributors, the lab said.