The African Development Bank Group (AfDB) and KPMG South Africa have unveiled a groundbreaking report proposing a novel approach to mitigating foreign currency risks that frequently impede energy infrastructure projects across Africa. This innovative mechanism, introduced at the Africa Energy Summit in Dar es Salaam, Tanzania, suggests utilizing a “non-circulating currency” backed by a diversified basket of Africa’s critical minerals to address the volatility and convertibility risks associated with traditional financing in US dollars and Euros. The summit, attended by African heads of state, including Liberia’s President Joseph Boakai, focused on leveraging Africa’s natural resources for sustainable economic growth and addressing the continent’s substantial funding gap.
The report, titled “New Mechanism for Mitigating Currency Risk to Support Africa’s Energy Transition,” emphasizes the challenges posed by foreign currency fluctuations to privately financed Independent Power Projects (IPPs). These fluctuations often impact affordability and sustainability, hindering the development of crucial energy infrastructure. The proposed non-circulating currency aims to provide exchange rate stability, a feature often lacking in local currencies. This stability is crucial for attracting investment and ensuring the long-term viability of energy projects.
The AfDB, the architect of this innovative financing mechanism, recognizes the immense potential of Africa’s vast critical mineral reserves, estimated to comprise approximately one-third of the global supply needed for the energy transition. Experts like Auguste Claude-Nguetsop, Partner and Head of Financial Services at KPMG Southern Africa, highlighted the sustained demand for these minerals over the next 30 years, emphasizing Africa’s pivotal role in the global shift towards cleaner energy sources. This mechanism offers a strategic opportunity for the continent to leverage its resource wealth to drive economic development and secure its place in the future energy landscape.
Wale Shonibare, Director for Energy Financial Solutions, Policy, and Regulations at the AfDB, underscored the importance of innovative financial solutions in realizing Africa’s green energy ambitions. The proposed currency convertibility mechanism is expected to stabilize investment flows, thereby accelerating sustainable development. By reducing reliance on volatile foreign currencies, the mechanism aims to create a more predictable and attractive investment environment, fostering confidence in long-term projects and facilitating the flow of capital into the African energy sector.
The report further outlines the potential benefits of this mechanism, including reduced capital costs for clean energy projects, enhanced cross-border financial cooperation and integration, and a strengthened negotiating position for Africa in global resource markets. These positive outcomes are projected to significantly contribute to narrowing the continent’s substantial $400 billion annual funding gap, supporting the achievement of sustainable development goals, and ensuring long-term energy security and economic prosperity. By addressing the financial constraints that often hinder development, this mechanism aims to unlock new economic opportunities, promote industrialization, and drive sustainable growth across the continent.
The report emphasizes the advantages for both lenders and borrowers and outlines the necessary steps for implementing the new mechanism. Experts like Frank Blackmore, Lead Economist at KPMG South Africa, highlight the profound economic impact of leveraging Africa’s critical mineral wealth. By mitigating currency risks and facilitating access to more stable financing, the mechanism can stimulate economic activity, create jobs, and contribute to a more sustainable and prosperous future for Africa. The successful implementation of this innovative approach holds the potential to transform the continent’s energy sector and drive significant economic progress.
