ADDIS ABABA, Feb 18 (Reuters) – African leaders have approved the establishment of a $20 billion continental financial stability fund, the African Development Bank (AfDB) said, a move designed to stave off potential debt crises on the continent before they take hold.

The facility, known as The African Financial Stability Mechanism (AFSM), will get its own credit rating to allow it to borrow on international capital markets, the AfDB, which will host the mechanism, said in a statement seen by Reuters on Tuesday.

African leaders had called for the creation of the fund in February 2022 and mandated the AfDB to carry out preparations to set it up.

The AfDB now intends to move quickly in drafting a formal agreement and securing ratification by states, it said in the statement following an African Union summit in the Ethiopian capital over the weekend.

As well as soaring external commercial repayments and the risk of default, many economies in the region are also grappling with pressure for higher spending, sluggish government revenues, and the effects of climate change.

Creation of the facility was also partly motivated by the fact that Africa lacks its own regional financial cushion, unlike Europe and Asia, which have arrangements of this kind.

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

Membership will be voluntary and open to any African Union member country willing to participate.

“Provision has (also) been made for at least 20% of non-African members provided the African states retain the majority of membership,” the AfDB said.

African nations face a range of debt pressures, the AfDB says.

Some such as Kenya and Gabon have issued international Eurobonds in recent years and investors have at times questioned their ability to repay.

These concerns led to a steep currency depreciation in Kenya in 2023, and a rating downgrade for Gabon by Fitch last week.

The AFSM will lend money at “concessional” rates, the head of the AfDB told Reuters last month, and beneficiaries will commit to defined macroeconomic and fiscal reforms.

“The core of AFSM’s mandate is not to support the provision of bailouts to African states but to prevent them,” said the AfDB.

(Reporting by Dawit Endeshaw in Addis Ababa and Duncan Miriri in Nairobi; Editing by Ammu Kannampilly, Marc Jones and David Holmes)