Lyon – France. The Franc CFA stands for African Financial Community, (in French, Communaute Financiere Africaine) and the debate over the usage of the franc CFA is a growing one amongst many Africans. Some prominent economists like the Togolese economist Nicolas Agbohou in his book Le franc CFA et l’Euro contre l’Afrique (1999), (The franc CFA, and the Euro against Africa) indicates that the franc CFA destroys Africa on two domains: Loss of sovereignty and Weakening of the state. (I will return on this issue in my next publication) But others argue that the Franc CFA has brought much stability to various African economies and has encouraged regional integration. To explain, the CFA franc zone arrangement defines the monetary relations between Central African Economic and Monetary Community (CEMAC), West African Economic and Monetary Union (WAEMU) and France. The CFA franc, originally created in 1945, currently serves as the common monetary unit for the 15 member countries of the West African Economic and Monetary Union (WAEMU) and those of the Central African Economic and Monetary Community (CEMAC) including the Republic of Comoros. The Republic of Comoros also adopted the Franc but is not a member of CEMAC and WAEMU, rather of the Franc CFA, which in spite of its non-affiliation to CEMAC and WAEMU have the same effects and influence exerted on them by the Franc CFA, France and its economic community. In recent years, there has been repeated calls from economists and politicians alike for the introduction of a new currency, which will be more reflective of fundamentals in WAEMU and CEMAC member countries’ economies. The reasons for an alteration of the CFA are conspicuous and so are the reasons for its permanency. Which prompts the question, is it time for West and Central African states to drop the franc’s CFA currency? Before we start, let’s look at the history of the Franc CFA membership and its aim, then proceed to explaining with historical facts, and, present features, why the Franc CFA should be dropped, and why it should be kept.
Membership
- Historically, all French colonies in sub-Saharan Africa were members of the broad franc zone. Once independent, however, former French colonies in northern Africa left the arrangement to introduce their own currencies, as did Guinea-Conakry (1958), Madagascar (1972), and Mauritania (1973).
- Today, the principal members of the CFA franc zone are France and the two African economic and monetary unions that evolved from the country groups served by the two issuance houses—the Central African Economic and Monetary Community (CEMAC, with the BEAC as its central bank) and the West African Economic and Monetary Union (WAEMU, with the BCEAO as the central bank). CEMAC has six members: Cameroon, the Central African Republic, Chad, the Republic of Congo, Equatorial Guinea, and Gabon. (Equatorial Guinea, a former Spanish colony, joined in 1985.) WAEMU has eight members: Benin, Burkina Faso, Côte d’Ivoire, Guinea- Bissau, Mali, Niger, Senegal, and Togo. (Guinea-Bissau, a former Portuguese colony, joined in 1997.) Comoros and Guinee-Conakry have adopted the Franc which is still pegged to the French Franc/Euro.
- The French Government guarantees convertibility of the CFA franc into French francs or the euro through an ‘operations accounts’, or compte d’operations. This automatically finances franc zone countries’ foreign exchange deficits whilst two thirds of surpluses are required to be deposited in the operations account. The overall deficit on the operations account has moved from $15m end-1986 to $928m end-1988 and deteriorated further in 1989-90.
Aim, institutional, and operational arrangements
- The CFA franc zone links three currencies: the CFA francs issued separately by each bank, and the euro. Both CFA francs are fixed to the euro (previously to the French franc) at the same rate, 655.957 per euro. However, the CFA francs are issued by two distinct central banks and are independent of each other. Each CFA franc is nominally convertible into the euro, but they are not directly convertible into each other.
- France guarantees the peg of the CFA franc to the euro. It provides an operations account in the French Treasury for each of the two central banks, on which they may draw in case of reserve shortages. While theoretically this amounts to a possibly unlimited overdraft, there are institutional safeguards and restrictions to ensure the viability of the arrangement. The most important are that (1) at least 20 percent of sight liabilities of each central bank must be covered by foreign exchange reserves, (2) at least 50 percent of foreign exchange reserves must be held in the operations account; and (3) increasing interest rate penalties apply if there is an overdraft. France is also represented on the board of both institutions.
- Within the limits of the fixed exchange rate arrangement, the BEAC and BCEAO are responsible for the conduct of monetary policy in their respective regions. Both central banks are also charged with implementing banking supervision at the regional level. Differences in the speed of policy and policy instrument reform between the two banks have led to differences in financial depth and in the array of tools available to the two central banks and to the autonomy of each central bank.
- After the 1994 devaluation, the unions initiated efforts to speed up economic and financial integration within sub regions. These were largely inspired by the institutional and legal arrangements of the EU and are intended to coordinate macroeconomic policies and create a common market. The current “second generation reforms” include the creation of regional infrastructure and strengthening of regional institutions.
- The CFA franc has been pegged to the French franc since 1948*. Only one devaluation has occurred during the history of the currency peg — from CFA50 to CFA100 = FF1 in January 1994.
Why should West and Central African States drop out of the CFA?
French neo-colonialism?
One of the hottest issues at the Dakar symposium was the question of whether maintaining a currency link defended by the French Treasury perpetuates French neo-colonialism. While CFA countries have made some gains in the franc zone system, Mr. Tchetche N’Guessan, Director of the Côte d’Ivoire Centre for Economic and Social Research, was among those arguing that France has reaped much greater benefits. Reviewing the history of economic relations and monetary systems between France and its former African colonies, Mr. N’Guessan said these systems took various forms but were always designed to enhance France’s development as a colonial power. Many CFA franc zone mechanisms were simply the “monetary dimension of the colonial agreement,” he said, noting that “exchange rate policies played a major role in [France’s] domination of its colonies.” And today, the fixed exchange rate regime “remains an essential factor in determining the economic performance of the CFA franc zone,” Mr. N’Guessan argued. When the terms of trade were favorable, Mr. N’Guessan continued, CFA countries had good track records in containing inflation and achieving superior growth relative to non-CFA countries. But he blamed the “financial repression” associated with the exchange rate regime for poor performance.
The Francs CFA is a remnant of French imperialism in Africa.
The CFA (Communaute Financiere Africaine) was an exclusive French economic zone that guaranteed the free convertibility of the CFA franc, the free transfer of capital, the pooling of gold and foreign exchange reserves of the member countries of the zone in a so called “Operations Account” at the French Treasury, and the maintenance of a fixed parity rate with the French franc. This paternalistic monetary arrangement gave France enormous economic advantages in its former colonies which it managed as its “farm” for the extraction of cheap primary products for its industries. The colonies were obliged, because of this special monetary arrangement where the CFA franc could be converted only into the French franc (and not the U.S. dollar or any other hard currency), to buy only manufactured goods from the subsidiaries of French multinational corporations, which enjoyed preferential economic conditions, including the possibility of the free transfer of their earnings to France without any obligations to plow back into the colony’s economy.
Theoretically, the French African governments could draw foreign exchange freely to meet their own needs, but the system and the issuance of import licenses were controlled by Frenchmen, and little hard currency found its way to Africa.
Thus, huge cocoa and coffee exporters like the Ivory Coast and Cameroon sold their products to the United States in dollars which went to Paris and were used for French economic development. The CFA franc in turn went to these neo-colonies to be used in the purchase of French goods. France therefore had about $600 million a year to finance its development.
Today, much of the foreign exchange goes to the French African countries, but since the CFA is convertible only in France, the 15 French African neo-colonies are still obliged to buy mostly French goods or Japanese goods from French
Middlemen, who hike the prices to make an extra profit. The free convertibility of the CFA franc into the French franc at a fixed rate was the principal advantage of the CFA franc zone in the face of other weak African currencies. This permitted the rapid growth of commerce in the zone. But unfortunately this principal advantage was suppressed in August 1993.
Monetary authoritarianism
The maintenance of the French currency in its former colonies has been described by a prominent Cameroonian economist, the late Prof. Tchundang Pouemi, as “monetary subjugation.” For a long time now the French economy had been noncompetitive in Europe. Consequently, the French franc (or the euro) had suffered from some speculative attacks, which always had adverse effects on the countries of the CFA franc zone. In January 1980 as well as in August 1993, as a result of the depreciation of the French franc in relation to the deutschemark, the CFA franc lost about 50% of its value. In the 14 French African neo-colonies, the repercussions were heavily felt with the increases of the prices of German imports and the doubling of the amounts of their debts to Germany.
Who calls the shots?
For more than a decade the CFA zone in Africa had been an area of artificial prosperity, because of the maintenance of an overvalued CFA franc despite the notoriously poor performance of the economies of the zone. The French, who still control the economy of the zone with about 80% of all investments, took advantage of the overvalued CFA franc and resisted World Bank and International Monetary Fund (IMF) pressures toward devaluation in 1994. French companies were in effect making enormous gains, because the overvalued CFA franc permitted them to indirectly grant subsidies to French exports while at the same time increasing the value of their investments in the zone.
With the main sectors of the French industry in crisis, with low-quality production, layoffs, and the consequent increase in unemployment by about 11%, former Prime Minister Edouard Balladur’s right-wing coalition government could no longer sustain the mammoth civil service sectors of French African countries through development assistance. But while it was already clear to the French authorities that devaluation was the only condition under which the IMF could disburse any new loans to CFA countries, French politicians and their African heads of state continued to frantically deny the imminence of devaluation. Meanwhile, French businessmen, who dominated the region’s import-export business, took advantage of the rumors to speculate on the CFA franc, siphoning huge amounts back to France, thus aggravating the liquidity problems of already hard-pressed French African governments.
Insolvent markets
The economies of the 15 CFA franc zone countries are in shambles. Based principally on one primary product, which is usually either cocoa, coffee, bananas, groundnuts, or cotton (and a few minerals in some countries), which earns nearly 80% of the foreign exchange, the countries depend on these products whose prices are generally buffeted by the fluctuations of the world market. French Africa had been encouraged by deceptively generous development assistance from France to continue producing only primary products, on the false premise that they enjoyed a comparative advantage in primary products. Meanwhile the French had taken over the industrial sector with the installation of subsidiaries of their multinational companies in the light industries, insurance, banking, timber and mineral exploitation, as well as in the import-export industries. With the money given to them by French development assistance agency, these countries had then created a fragile welfare-state mentality with mammoth civil services, which drained more resources than the government could earn.
Above all, corruption and mismanagement had become so rampant that even heads of state were openly known to protect their corrupt cronies. In 1991, there were 36 banks in the franc zone countries, discharged with record losses of more than $200 million. The list of defaulting banks with loans of more than $ 10,000 each in most countries read like a political Who’s Who, with all the prominent government and business personalities involved. With the clamor for democratization in 1990 and its violent repression in nearly all French African countries through fraudulent elections, political tension had scared off all potential foreign investors.
Who profits?
The IMF and the World Bank “medicine men” prescribed devaluation as a panacea for the economic ills of the franc zone. In theory, they say, devaluation encourages exports in the country since it makes exports cheaper and consequently more competitive. It is also said to discourage imports because the revaluation of foreign currencies makes imports more expensive. The IMF promised to sign the third confirmation accords with CFA countries by grant loans, also encouraging foreign investments because of cheaper labor. The devaluation was also expected to encourage citizens to consume local goods as well as the creation of local industries. In fact, most governments, particularly those of Cameroon, Ivory Coast, Senegal, and Burkina Faso, had increased the local prices of export crops.
But the devaluation seemed to have aggravated the situation. In Cameroon, salaries were reduced by nearly 70% a few days before the devaluation of Jan. 12, 1994. With primary products such as cocoa, coffee, rubber, bananas, and cotton flooding the world market, since they are produced by more than 30 other Third World countries, the prices are bound to be unstable and prone to falling drastically. These are not, therefore, products to rely on for the financing of a country’s development. Moreover, the foreign debts of these countries have doubled with debt servicing rates that surpass 47% of their GNP! Above all, these countries are bound to import nearly everything from staple foods like rice, milk, and beef, to the inputs of the Import Substitution Industries, which are run by the French.
African Indigents
As an alternative measure to the very severe devaluation, France had cancelled the debts of most of its low-income African debtor countries, and promised the disbursement of higher sums in development assistance. The hypocrisy of their measure was that, while the announcement of the few millions of CFA francs in aid to these neo-colonies was done with great pomp, as the manifestation of French magnanimity toward poor Africans (although the lion’s share of this money is spent on the purchase of low-grade French manufactures and on the astronomical salaries of French technical advisers), the huge sums siphoned back to France daily go in silence, particularly as no one makes announcements about the figures.
Devaluation does not seem to have any short-term or long-term advantage to CFA zone countries. They may double or quadruple the exports of their primary products, but the vagaries of a world market which they don’t control, coupled with the obligation to import nearly every manufactured good, obliges them to depend on foreign loans’ while further enslaving them in a dependency syndrome. The industrial landscape of French African countries is littered with “white elephant” projects which have drained millions of dollars without yielding any dividends.
The French on the other hand, in their avidity to protect the “francophone” market where goods from their uncompetitive industrial sector could be sold at prohibitive prices, had aborted any indigenous industrial production, which could have provided products with added value on the world market to maximize the foreign exchange earnings of these countries. The devaluation had pauperized the people of the franc zone, who had been sold over to the IMF and World Bank by their old French masters. France still maintains its economic stranglehold over this region as the last bastion of its diminishing colonial empire, for fear of seeing the clogged wheels of its technologically archaic industry finally crumble.
Unable to sustain a tolerable standard of living for its neo-colonies because of its own internal woes, France played the ostrich, while handing over its former colonial subjects to the usurers of Wall Street, the US treasury, and the IMF and World Bank “austerity industrial complex” for further mistreatment. The risk of social explosion had increased with potential tension in every capital; hunger, poverty, labor strikes, and disease were taking their toll.
Franc CFA guarantees macroeconomic stability, and a favorable framework for international investments.
Above and beyond, force is to note that the franc CFA remains an asset for the countries which have it in common. First of all, it warranties macroeconomic stability. For proof, inflation has been only 2 to 3 % on average over the period 2000-2015 in the franc zone, against nearly 10 % in the rest of sub-Saharan Africa. Nowadays, the CFA offers a more favorable monetary framework, making safe international investments. No risk indeed to see franc CFA break down because (as it is currently the case of currencies of countries like Nigeria, Kenya, Tanzania or Ghana) of the impact of the sluggish growth in China, or a fall in prices of primary commodities in the world market. Lastly, international investors can invest in UEMOA or CEMAC zone in full safety, the convertibility of franc CFA with the euro is guaranteed by the Franc zone.
The franc CFA prompts regional integration which is of economic significance.
Another potential benefit of the CFA-Franc/euro peg is if the maintenance and strengthening of a common currency acts as a spur to broader economic integration in West and Central Africa. Because maintenance of the common currency requires harmonization of policies including fiscal and trade policies it’s a strong incentive to do the right thing to build a bigger base for regional integration. In West Africa, for example, CFA countries form half of the 16-nation Economic Community of West African States (ECOWAS). Assuming the CFA countries continue to enjoy low inflation, strong growth and improved economic stability through the macroeconomic policies associated with the euro peg, the ECOWAS region as a whole will benefit from the spillover effects. Thus the euro acts as an incentive to non-CFA, ECOWAS countries to work towards greater harmonization of monetary and financial policies with the CFA. And now there is talk of having a dual monetary zone in Africa because of what is happening with the euro. Other economists and public officials predict renewed impetus for regional integration throughout Africa. Already the euro has reinvigorated the current slow pace of economic integration in Africa, particularly in non-CFA Africa, the birth of the African Union passports, and the Trans African trade which composes over 33 African countries (which is the largest trade block in the word) is only a testimony to the influence the Euro has had on the CFA zone countries.
In conclusion, the perception which prevails among African leaders is that the franc zone has more advantages than disadvantages. So much so that a more thorough integration is currently being studied, which would see the two monetary areas integrating into one, and thus allowing the use of only one franc CFA unit in Central and West Africa.
Meanwhile, other economists of the region have started thinking seriously about quitting the franc zone and creating collective currency area with ECOWAS (the Economic Community of West African States), Central African Economic and Monetary Community (CEMAC) and the PTA (Preferential Trade Area) in East and Central Africa, as well as the Southern Africa Development and Coordination Conference (SADOC), which covers the frontline states of southern Africa. It is quite clear the debate over the franc CFA’s value will remain a contentious one in the minds of most Africans.
