A new, bold proposal from the African Development Bank (AfDB) and KPMG could empower African countries to set their own financial terms in energy financing. As the effects of foreign aid cuts ripple outward, Africa needs solutions that enable it to finance its aspirations and reclaim agency. This — dare I say Africa-first — idea takes on two significant barriers to Africa’s high-energy future: hard currency dependence and currency volatility. The mechanism deserves a major spotlight, a robust conversation, and experimentation.

How forex dependence is stifling Africa’s energy infrastructure 

African infrastructure projects reliably pay back their debt and have the lowest default rate in the world. However, the amount borrowers end up paying for these projects often depends on the stability and predictability of the country’s currency, which often aren’t very good. For instance, in the ten years to the end of 2024, the Ghanaian cedi lost 78% of its value against the dollar, South Africa’s rand 39%, and Kenya’s shilling 30%.

To avoid being exposed to such volatility, lenders demand hard currency (US dollar or euro) payments and sovereign guarantees (that’s when governments pledge to cover debt repayment if the borrower defaults) as a condition of their loans. This creates the following challenges:

• Limited sovereign guarantees reduce access to finance. Africa’s foreign reserves are already stretched across competing priorities due to the continent’s heavy reliance on imports. Consequently, securing sovereign guarantees becomes increasingly difficult, limiting access to finance for energy infrastructure projects.
• Currency volatility raises risk for both project financiers and borrowers. With energy project loans required to be repaid in forex and spanning 10-20 years, changes in exchange rate create a high degree of repayment uncertainty for lenders and debt distress for borrowers.
• High and erratic inflation creates additional investment risk. Many African countries face persistent inflation, some with rates into the double digits. Public energy projects and utilities that rely on tariffs for repayment are affected by customers’ low purchasing power due to inflationary pressures and tariff rate adjustments that don’t keep pace.

All these risks deter foreign investment in energy projects, contributing to a $110 billion shortfall in Africa’s energy investment pipeline.

Restoring Africa’s agency in energy finance

To counter these challenges, AfDB and KPMG have proposed a new energy financing mechanism. The mechanism — we need a cool name for it — would pool a small portion of critical mineral reserves from participating African countries to create a stable, diversified commodity basket. This basket backs a unit of value referred to as AUA or African Units of Accounts — think of it as a special financial token composed of a mix of minerals rather than a single commodity. After lenders and borrowers agree on loan terms and opt into the mechanism, a settlement agent — a financial intermediary — would manage the repayment. Instead of struggling with volatile exchange rates, countries can repay loans in local currency, and the settlement agent sells some of the pledged minerals to ensure investors are paid back in hard currency.

Why this mechanism is promising

• Stabilize currency risk through a diverse commodity mix. Resource-backed infrastructure funding frameworks are not new — examples like Angola’s oil-backed loan (2002) or Guinea’s bauxite-backed loan (2017) from China may come to mind. While an improvement on hard-currency loans, single-resource-backed deals remain vulnerable to local and global political and economic shocks. In contrast, the commodity basket approach proposed by the mechanism offers long-term protection against such volatility. AfDB and KPMG found that mineral-backed commodity baskets, despite fluctuations, outperform African and most hard currencies in appreciation and stability.
• Broaden and diversify the foreign investment pool by lowering barriers for lenders. In conventional lending, lenders without sovereign guarantees take on additional risk, as exchange rate fluctuation could cost them or delay repayment. This volatility has also pushed non-Western lenders to demand hard currency financing to protect their investments. By introducing a commodity-based guarantee, the mechanism uncouples project risk from currency risk, offering greater repayment assurance. This gives lenders confidence to invest in local or alternative currencies, increasing both the pool of investors and the likelihood of investment.
• Ensure sustainable financing and lower dependence on external partners. Tools provided by GuarantCo, InfraCredit, and Currency Exchange Fund help lenders hedge currency risk and provide local currency loans in emerging markets. While these are well and good, they remain insufficient and depend on external funding from development agencies, development finance and multilateral institutions, limiting long-term capital availability. The proposed mechanism offers Africa a path to independence.
• Strengthen domestic capital markets by enabling local currency repayment. Over-reliance on foreign currency indirectly stifles local capital markets — keeping domestic markets, savings, pensions, and bonds too shallow to support local infrastructure lending. South Africa exemplifies the positive feedback loop of local currency use, with a growing number of infrastructure projects backed by a strong local capital market. By enabling local currency repayment, this mechanism provides a pathway for African countries to strengthen their own financial systems for future investment.

Where the mechanism stands now, and some questions

AfDB first introduced the mechanism during its annual meeting in Nairobi and later presented it at the 2024 African Energy Forum, where it received positive interest and curiosity from attendees. Since then, AfDB has been working to validate the technical aspects of the proposal.

By now, it’s no secret that I’m a fan of this proposal, but here are some things I’m still wondering about:

• Does it make deals fairer? Does it support beneficiation? Admittedly, no single solution can fix everything. However, given Africa’s challenges with exploitative deals and limited processing capacity, this mechanism’s ability to address these issues is unclear — especially since it applies only after loan terms are set.
• Can the mechanism function when resources are controlled by foreign entities? In many cases, mining assets and exploration rights in Africa are owned by foreign companies — the same companies likely needed to guarantee the reserves backing this mechanism. This raises an important question: how can the mechanism operate effectively in a landscape where control over resources lies outside of African governments?
• What are the tool’s limits? The stability of the mechanism depends on the depth and diversity of the resource pool, which has limits and uncertainty. So, what are the minimum reserve commitments required? What is the minimum number of countries needed to make the tool effective? And with potential technological innovation and market shifts, what resource combinations risk being too volatile to last?
• Who else could serve as an agile settlement agent? The report recommends multilateral banks as pilot settlement agents for the mechanism. However, given banks’ many priorities, and the delays and bureaucracy often associated with large institutions, are there better-suited alternatives?
• What about non-mineral resource-rich countries? As currently envisioned, the mechanism is designed for participating countries with commodity reserves (a.k.a. mineral-rich nations). Yet, these countries already have some advantage, as they can leverage hard currency earnings to finance energy projects. So, how can those countries without significant mineral wealth benefit from this financing model?
• How do we make this feasible? How do we move fast and build things? The urgency of the challenge — coupled with a political climate eager for policies that deliver — demands bold action. Which countries are good champions for this? What hesitations or concerns do they have? What do we need to test this mechanism quickly and learn more?

An African solution for Africa

AfDB’s proposed mechanism is a promising, homegrown solution to solve Africa’s currency challenges in financing energy infrastructure — an essential enabler for every other sector and economic growth. The proposal deserves serious attention, robust debate, ideas for improvement, and most importantly, a path towards real-world testing.