AfDB and KPMG Launch Innovative Mechanism to Mitigate Currency Risks in Africa’s Energy Transition

New Report Proposes a Non-Circulating Currency Backed by Critical Minerals to Unlock Investment for Energy Infrastructure Projects.

At the Africa Energy Summit held this week in Dar es Salaam, Tanzania, the African Development Bank Group and KPMG South Africa introduced a groundbreaking report offering a novel solution to mitigate the foreign currency risks that often hinder the successful implementation of energy infrastructure projects across Africa. This partnership aims to support the continent’s energy transition by addressing the critical issue of currency volatility that affects the affordability and sustainability of privately financed Independent Power Projects (IPPs).

The report, titled “New Mechanism for Mitigating Currency Risk to Support Africa’s Energy Transition,” explores a unique approach in which African countries could pool their mineral resources into a “non-circulating currency” that would be backed by a diversified basket of Africa’s essential commodities. This innovative currency mechanism would provide an alternative to the current reliance on US dollar and Euro-denominated financing, offering a more stable solution to the exchange rate instability that plagues local currencies.

The concept was developed by the African Development Bank as a way to harness Africa’s vast mineral wealth, which is critical to the global energy transition. The Bank estimates that Africa holds approximately a third of the world’s required supply of essential minerals needed for the transition to cleaner energy sources. By pooling resources in this new form of non-circulating currency, African nations can mitigate the financial risks tied to exchange rate fluctuations, which are often a significant barrier to securing the capital needed for energy infrastructure development.

Auguste Claude-Nguetsop, Partner and Head of Financial Services at KPMG Southern Africa, highlighted the growing global demand for critical minerals, noting, “The demand for critical minerals will continue to grow exponentially over the next 30 years, and Africa’s role in the global energy transition cannot be overstated. To unlock this potential, it is essential to implement innovative financing mechanisms that address currency and convertibility risks.”

The report further underscores that successful implementation of this mechanism will lead to several critical outcomes for Africa’s energy sector. It will reduce the cost of capital for clean energy projects, attract private investment, encourage cross-border financial cooperation, and bolster Africa’s negotiating power in the global resource markets. These benefits will not only help to narrow the continent’s $400 billion annual funding gap but also support the achievement of Sustainable Development Goals (SDGs) while ensuring long-term energy security and fostering economic prosperity across the continent.

Wale Shonibare, Director of Energy Financial Solutions, Policy and Regulations at the African Development Bank, emphasized the importance of innovative financial solutions to unlock Africa’s green energy potential: “Africa’s green energy future depends on unlocking innovative financial solutions that empower the continent to harness its vast mineral wealth. The proposed currency convertibility mechanism will play a crucial role in stabilizing investment flows and accelerating sustainable development.”

The proposed non-circulating currency mechanism not only holds promise for stabilizing the financial environment but also ensures that lenders and borrowers alike will benefit from reduced risks and lower costs. The report concludes with a roadmap for full implementation, outlining the necessary steps to turn this concept into a working solution for Africa’s energy transition.

Frank Blackmore, Lead Economist at KPMG South Africa, explained the broader economic impact of this approach: “The economic impact of leveraging Africa’s critical mineral wealth is profound. By addressing financial constraints and mitigating currency risks, we can unlock new economic opportunities, enhance industrialization, and drive sustainable growth across the continent.”

The Africa Energy Summit in Dar es Salaam has provided a critical platform for stakeholders from African governments, multilateral development banks, private sector investors, and civil society representatives to come together and explore innovative solutions to address the continent’s energy challenges. This report by the African Development Bank and KPMG South Africa is a significant step towards ensuring Africa’s sustainable energy future, leveraging its abundant natural resources to create lasting economic growth and stability.