(Ecofin Agency) - Africa houses around 30% of critical minerals, essential for the energy transition. However, the continent attracts only 3% of global energy investment, while it requires over $200 billion annually to meet its energy-related targets by 2030, according to the International Energy Agency (IEA).

In response to this challenge, the African Development Bank (AfDB) plans to introduce a new non-circulating currency called “African Units of Account” (AUA). In a report published on January 28, the institution stated that this currency would be backed by critical minerals, to stimulate investment in green projects across the continent.

Under this model, African nations will be asked to pool an agreed amount of their proven mineral reserves, including lithium, cobalt, and graphite, before establishing a conversion rate for local currencies. International banks and development finance institutions would then provide loans in stable currencies like the dollar or euro for clean energy projects.

These loans would be converted into AUA at a fixed exchange rate, mitigating the risks associated with fluctuations in local currencies. Currently, when African countries repay hard currency loans, they often face higher costs if their local currencies depreciate against the dollar. With the AfDB's system, countries would repay their debts in local currency to a settlement agency, which would sell the minerals on international markets to obtain hard currency for loan repayment.

Kevin Kariuki, AfDB Vice President responsible for Electricity, Energy, Climate, and Green Growth, highlighted the importance of this initiative in 2023. He stated that Africa needs a transparent and well-governed mechanism to guarantee stability for investors, facilitate borrowing, and reduce foreign exchange risks.

A Useful Solution

Establishing the AUA system could allow African countries to better profit from their mineral resources as they work towards accelerating their energy transition. Despite possessing significant mineral reserves necessary for this transition, African nations currently capture only about 3% of global energy spending and 2% of clean energy investments. The World Bank estimates that around 600 million people in Africa still lack access to electricity.

While the World Bank projected total energy expenditure in Africa at $110 billion by 2024, the International Energy Agency (IEA) estimates that over $200 billion in annual investment will be required to meet local energy targets by 2030.

Although the AUA system aims to attract more foreign investment in energy projects, details on its implementation remain unclear. The timeline for introducing this new currency has not yet been disclosed.

Moreover, there are concerns about how countries without proven reserves of critical minerals might benefit from this initiative. Currently, only a few nations possess these essential resources: the DRC (copper and cobalt), Zambia (copper), South Africa (platinum group metals), Gabon (manganese), Mozambique, Madagascar, and Tanzania (graphite), as well as Zimbabwe and Mali (lithium). The AfDB has not specified how countries lacking these resources may participate in its initiative.

Aurel Sèdjro Houenou (intern)