Written by Alexandre Vaillant, Avocat Conseil, Fasken, Johannesburg
The CFA Franc, which has until recently been used in 14 West and Central African countries, has been the subject of many passionate debates over the last years. It has been applauded by some people as being a stabilizing force, and criticized by others as a tool of neo-colonialism that has left countries without control of their own currency.
In this article we look into the history of the CFA Franc, evaluate the system and determine the factors that have been considered in the ongoing reforms.
A MONETARY POLICY
The CFA Franc is a 74 year old monetary system enforced in 1945 by the French colonial government, initially valued equal to the French Franc. It has evolved from meaning “Franc of the French colonies of Africa”, prior the independence of the then African colonies, to being the “Franc of the Financial Community of Africa” when it was inherited by two African regions; the West African Economic and Monetary Community (UEMOA/WAEMU) and the Central African Economic and Monetary Union (CEMAC), collectively known as the CFA Franc zones. The WAEMU region is made up of 8 member countries: Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo. The CEMAC region is a separate independent region made up of 6 member countries: Cameroon, Central African Republic, Equatorial Guinea, Gabon and the Republic of Congo.1 Guinea-Bissau and Equatorial Guinea are the only countries who are not former French colonies.
The WAEMU and CEMAC regions have their own independent central banks, which implement the monetary policies of the member states in each region, the Central Bank of the West African States (BCEAO) located in Dakar, Senegal and the Bank of the Central African States (BEAC) located in Yaoundé, Cameroon. Their common currency, the CFA Franc, is manufactured, printed and distributed by the Bank of France in Paris. 50% of the foreign exchange reserves of the CFA Franc is mandatorily held by the Bank of France in operation accounts in order to secure the unlimited convertibility and guaranteed exchange rate, backed by the French Treasury and valued against the Euro at the fixed rate of 655.957 FCFA (Before the Euro, 1 CFA Franc = 100 French Francs (FRF). With the conversion of FRF into EUR at the rate of 1 EUR = 6.55957 FRF, 1EUR = 655.957 FCFA). Although they adopted a common monetary arrangement, these regions have separate economies that are not valued against each other and have become increasingly heterogeneous. Although both are pegged against the Euro, a WAEMU CFA Franc (XOF) cannot also be used in the CEMAC zone (XAF) and vice versa.
AN INTERCONTINENTAL UNION
According to the World Policy Institute2, “the CFA Franc system stemmed from what is called ’double anchoring’ where the currency is first anchored at the country level when the members are gathered into regional monetary unions, and anchored again to the currency of an external source”. This resulted in the economic climate of the Euro having a direct impact on the African economies. The World Policy Institute has noted that these zones have suffered from a structural current account deficit since France anchored its currency to the Euro in 2001. A strong Euro ultimately has had a detrimental impact on the African member states as it causes an appreciation of the CFA Franc. This caused a rise in the value of their commodities but a decline of the competitiveness of their exports, making the currency vulnerable to external shocks during trade fluctuations due to the inflexibility of their exchange rate.
On the other hand, a report by the World Institute of Development Research3 highlights that being pegged against the Euro introduces the requirements of following certain European monetary policy rules as determined by the Maastricht Treaty. Along with setting out the timeline for the introduction of the Euro, it indeed established convergence criteria to ensure price stability is maintained in the Euro zone even when new countries join the currency. The convergence criteria work to ensure that countries are stable in the following areas: inflation, levels of public debt, interest rates and exchange rate The Maastricht Treaty has been regarded as the reason for economic stability within the CFA Franc region and the reduction of risk and uncertainty for investors. Economic opinions differ regarding comparisons with African countries outside the CFA Franc zone. The World Policy Institute noted that the growth rate of the CFA zone is not significantly different from that of other countries with a comparable level of development and the stability within the regions has not increased direct foreign investment. In a contrasting opinion, a senior researcher at the University of Dakar4 has noted that Ivory Coast and Senegal, are among the 8 countries with the highest economic growth in the world with a growth rate of 6.9% and 7.2% respectively (before the Covid-19 crisis). In comparison to the rest of the continent, the researcher noted that two countries in the CFA zone are among the top four in the ranking of African countries by GDP per capita.
A POLITICAL INTEGRATION
The socio-political climate of this African-European cooperation has been criticized for the dominance dependence and alleged systematic control of these economies by France. A highlighted factor is that the positions of authority held by French officials in the regions, with France having a de facto veto on the board of both central banks.
The Minister of Economy in the Republic of Congo5 holds the view that the monetary system does not take the exercise of national sovereignty hostage or in his words, “the sovereignty of a country cannot be judged by its currency.” He makes the point that the function of money is to act as an intermediary for trade, as a unit to account for the value of exchange, as a reserve for purchasing power and that ultimately, a currency other than the CFA Franc will not contribute to economic development as seen in countries that have left the CFA Franc zone, and have not seen greater development since their fiscal independence. He noted that the fundamental questions that ought to be the centre of these conversations are questions relating to the management of the economy that results in long term growth while maintaining low inflation rates and security amid trade relations.
A stable, low inflation rate has economic benefits on the cost of living, conducting business and the valuation of commodities. The inflation rate in the CFA Franc zone has rarely risen above 3%, as opposed to other Sub-Saharan countries such as Ghana and Nigeria, whose inflation rate has fluctuated from 9.2% in 2012, to 6.28% in 2014, to 11.19% in 2016. Low inflation rates in both the CFA Franc regions have provided those countries with opportunities for debt financing from their offshore reserves as well as the International Monetary Fund. Despite the mechanisms in place for economic stability, there is still uncertainty regarding the valuation of the CFA Franc.
A CALL FOR CHANGE
The devaluation of the CFA Franc by 50% in 1994, aimed at correcting major macroeconomic imbalances and boosting economic development. This was done through decreasing the inflated prices for exports and aiding local traders to compete effectively in the world market6. This reform initially destabilised the socio-economic climate of these regions, prices for goods seemingly more than doubled overnight and weakened consumer buying power. Consumers are said to have been progressively forced to rely on locally supplied goods, which resulted in an increase in local production and ultimately improved trade balances. The debt financing from the economic reserves and the IMF were provided to assist in the economic recovery after the devaluation, as well as the drop in oil prices that severely affected the regions in 2012. The effects of this devaluation are in still in a number of minds, and this has fuelled discontent. Since 2016, this discontent has grown more and more, and eminent personalities such as the former IMF chief, Mr Strauss Kahn, have called to reform the CFA Franc.
REFORM
Though there now seems to be a consensus on the need for a reform of the CFA Franc zone, there are still many uncertainties in order to go ahead with it. CEDEAO/ ECOWAS (Economic community of West African States) i.e. WAEMU countries plus Cape Verde, Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone, has indeed been working on a common currency since 1983. In 2000, WAEMU set up for a two-step approach, one for CFA Franc countries, and one for non CFA Franc countries, which would be included in a second monetary union, the ZMAO/WAMZ (West African Monetary Zone), both monetary zones to be thereafter merged. In 2009, it established a roadmap for the new currency and pencilled 2020 as the date for its implementation. Even though the WAMZ common currency did not see the light of day, in 2015 the ECOWAS countries agreed that the new currency should be created in 2020 for all countries respecting convergence criterion. On 29 June 2019, in Abuja, the heads of state of the 15 ECOWAS members agreed to name the currency ECO, that it would have a flexible exchange rate, and that there will be a federal central bank. In 21 December 2019, WAEMU heads of state chose EC as the symbol of the Eco and named the new central bank the BCAO (Central Bank of West Africa).
However, on the same day, Mr Macron and Mr Ouattara, the French and Cote d’Ivoire presidents, announced the reform of the CFA Franc and its new name, the ECO, to be set up also in 2020. This created a shock within WAEMU as until then, no one in West Africa thought the single currency would not be created around Nigeria and its Naira. Nigeria, with 200 million inhabitants and 70% of the region’s GDP is indeed the powerhouse of the area. According to this new announcement, the ECO should now be built using the CFA Franc members at the core. Even more, the ECO would not have a flexible change regime but stay with a fixed exchange rate on the Euro (contrary to what was agreed to in Abuja), and would still benefit from a guarantee from France (even though the obligation of keeping 50% of the reserves in the French treasury was removed). For other members of the WAEMU, especially Nigeria, this constituted a declaration of war.
WHERE TO FROM HERE?
President Ouattara of Cote d’Ivoire mentioned a number of reasons for going astray from what had been agreed in June 2019, including the fixed vs. flexible exchange regimes by saying that changing the exchange rates would create “a significant risk of brutal and very damaging fluctuations to our {WAEMU} economies”7, and even though he notes the flexible exchange system, “(one) should proceed in stages.”8 Behind the scenes, Ghana seems interested in joining the revised CFA system, and so is Cape Verde – its currency is guaranteed by Portugal and has a fixed exchange rate against the Euro. This could allow new countries in the new CFA, which could serve as a basis for the expanded ECO.
With Covid-19 and its long term impacts on macroeconomics fundamentals of all countries, from Europe to West Africa, one would have to reconsider the progression of this in the next few years. This is only the beginning of the reform of the CFA Franc.
PARIS ONE STEP CLOSER TO END THE CFA FRANC IN WEST AFRICA
On 20 May, the French cabinet adopted draft legislation aiming at modifying France’s monetary agreement with the eight countries9 part of the West African Economic and Monetary Union (WAEMU) using the CFA Franc.
This announcement follows the unexpected declaration made on 21 December 2019 by Mr Macron and Mr Ouattara, the French and Côte d’Ivoire presidents, proclaiming the reform of the West African CFA Franc and its new name, the ECO, to be set up in 2020. The declaration took place a few months after the heads of state of the fifteen Economic Community of West African States (ECOWAS) members10 – including Côte d’Ivoire – had agreed on 29 June 2019 to create a new regional currency named the ECO, having a flexible exchange rate and a federal central bank to oversee the new system.
The draft legislation provides for two elements which particularly crystallized the tensions around the CFA Franc. Firstly, there will no longer be representatives of France in the technical governance bodies of the area, in particular of the Central Bank of West African States (BCEAO) – where France had non-casting votes. Secondly, the BCEAO will no longer be required to deposit at least 50% of its foreign exchange reserves in French Treasury operating accounts.
From now on, the foreign exchange reserves will be placed by the BCEAO where it wishes. In the minds of many Africans, this money, which will no longer be located in the accounts of the French treasury, will be used to finance the development of member countries. However, this idea has practical challenges. Each foreign exchange reserve already has a counterpart which has been created locally, and the currencies are used to support very high imports from African countries which produce little.
Two major elements of the CFA Franc will however remain:
- The first element is the fixed parity which will be maintained between the new currency and the European currency. This is the very heart of the CFA system. France maintains that this parity was wanted by African countries. But critics point out that parity was strongly “recommended” to the African heads of State. This parity has made it possible to preserve real stability and relatively high levels of growth, but it also limited development finance capacities due to the need to stabilize the currency.
- The second element is the unlimited and unconditional convertibility guarantee provided by France. Analysts and rating agencies view this guarantee as necessary or, even essential, arguing that without it, the weak competitiveness of the economies of the CFA Franc zone could have precipitated the member countries into macroeconomic chaos. However, to date, the terms of this guarantee have not been specified. The only known element is that France requires privileged access to macroeconomic information from the WAEMU to maintain its guarantee.
Ratification by French parliament of the draft legislation is scheduled to happen during the third quarter of 2020. We will need to see if such ratification takes place and the impact this reform it will have has on the ECOWAS common currency project.
Endnotes:
1 – M, Tadesse (2018) ‘Economic Questions – The CFA Franc Zones: Neocolonialism and Dependency’ Economic Questions
2 – I, Coulibaly (2017) ‘Costs and Benefits of the CFA Franc’ World Policy Institute
3 – AA, Amin (2000) ‘Long-Term Growth in the CFA Franc Zone Countries’ World Institute of Development Research.
4 – A, Ndiaye (2019) ‘Should we abandon the CFA Franc’ Financial Afrik.
5 – G, Ondongo (2018) ‘CFA Franc: “The sovereignty of a country cannot be judged by its currency”’ Republic of Congo – Ministry of Economy, Industry and Public Portfolio.
6 – G. Ramirez and C. Tsangarides (2007) ‘Competitiveness in the CFA Franc Zone’ IMF Working Paper
7 – Jeune Afrique No.3083, 9 to 15 February 2020
8 – Jeune Afrique No.3083, 9 to 15 February 2020
9 – Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Niger, Mali, Senegal, Togo
10 – Benin, Burkina Faso, Cabo Verde, Côte d’Ivoire, The Gambia, Ghana, Guinea, Guinea Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo.
