As Sierra Leone grapples with a high risk of debt distress, a new initiative from the African Union (AU) could offer a potential path toward financial stability.
According to a new report posted on the Africa Development Bank (AFDB) official website on Friday 21st February 2025, the AU’s Specialized Technical Committee (STC) on Finance, Monetary Affairs, Economic Planning, and Integration has endorsed a report proposing the establishment of the African Financing Stability Mechanism (AFSM). This move comes as Sierra Leone and other African nations face mounting debt challenges.
Sierra Leone’s debt situation has worsened over the years, mirroring broader economic difficulties across Africa. By September 2024, the country was classified among those at high risk of debt distress, a status driven by rising public debt, reliance on costly non-concessional borrowing, and increasing liquidity needs.
Since 2010, Sierra Leone has seen a significant surge in public debt, intensified by external shocks and limited access to affordable credit. With concessional financing becoming scarcer, the government has turned to high-interest options such as Eurobonds, which come with shorter repayment periods and higher financial risks.
This has increased the country’s need for liquidity, particularly as African nations collectively require an estimated $10 billion per year between 2024 and 2033 for debt refinancing.
As mentioned in the report, rising debt levels cannot only cause instability within a country but also pose a risk to nearby economies, adding that when a country defaults on its debt, the economic impact can spread to its neighbors.
“Debt defaults in one country can transmit economic distress to neighboring countries through several mechanisms, including trade links, financial sector contagion, cross-border investments, exchange rate pressures or investor sentiment,”
The proposed AFSM seeks to ease this burden by offering African nations a structured, long-term solution for refinancing debt under favorable conditions. The mechanism aims to address weaknesses in the current global financial system by ensuring that vulnerable economies can access support without resorting to unsustainable borrowing.
For Sierra Leone, this initiative presents an opportunity to stabilize its finances and redirect resources toward critical sectors such as infrastructure, education, and healthcare.
The report furthered that under the AFSM, member countries could benefit from refinancing loans and bond purchase programs in both primary and secondary markets, with at least 20% of its capital base expected to come from non-African members.
It was also mentioned in the report that this initiative is also designed to include legal and governance structures that ensure transparency and sustainability, adding that participation in the AFSM will be voluntary and its success hinges on securing substantial funding, with the AU proposing a dual capital structure that blends market financing with contributions from member states.
