Key sectors: all
Key risks: CIET; CF
‘Currency is not a technical issue’, wrote former French Prime Minister Edouard Balladur, instead ‘it affects the independence of nations.’ Balladur was writing about plans to create the Euro, but he could have been referring to the Central and West African CFA Francs. Those that protested the CFA franc in October 2015 called the event an “anti-imperial march”, and it has been denounced as a symbol of France’s continued exploitation of Africa. Thus, while there is debate over its economic value, much of the opposition to the currencies revolves around its colonial underpinnings.
The 60-year-old CFA franc zone consists of two separate, but related, monetary unions. Benin, Burkina Faso, Côte D’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo are part of the West African Economic and Monetary Union (WAEMU), while Cameroon, Central African Republic, Chad, Congo-Brazzaville, Equatorial Guinea and Gabon are part of the Central African Economic and Monetary Community (CEMAC). Each grouping issues their own CFA Franc, fixed at a parity of 665.957 to the Euro (maintaining a pre-1999 100:1 French Franc ratio), which has only changed once, in 1994. The French Treasury guarantees the conversion of CFA Francs to Euros in exchange for the African central banks holding more than 50 per cent of their FX reserves with the French Treasury.
CFA franc zone membership has several important economic implications. Members do not have direct control over interest rates, although underdeveloped financial sectors mean that this does not seriously hinder macroeconomic management. Exchange rates do not change to absorb shocks, but this negative is likely outweighed by the avoidance currency volatility, and the associated inflation. With African sovereigns increasing non-concessionary external borrowing, avoiding destabilising increases in debt servicing costs due to volatility is a huge asset. As a comparison, Ghana’s cedi fell 22 per cent against the dollar over the last two years, double the CFA Franc-Dollar fall. Controls on spending have been largely effective in preventing the development of macroeconomic imbalances.
Opponents of the currency claim that it is an impediment to development as exporters struggle due to the relative strength of the Euro. This may have limited foreign investment into the CFA zone. Furthermore, as trade relations with Asia have expanded, the utility of a Euro-peg has fallen. But overall there is little evidence that medium term growth in the CFA zone lags the rest of the continent.
Even as leaders, like Chad’s Idris Deby, have criticized the CFA Franc with a mix of economics and anti-colonial rhetoric, there has yet to be a mass movement demanding its removal. Perhaps the CFAs stability is due to fears that abandoning the peg would risk a massive devaluation that could result in inflation, shortages, and unrest, as it did in 1994. Perhaps elites are seduced by their ability to transfer unlimited amounts of cash out of the country and into Euros. Regardless, if the CFA Franc is to be threatened in the near future it will likely be due to Paris. In a recent visit to Chad, Front National Leader Marine Le Pen promised if elected president to abolish the CFA franc. Le Pen is not favoured to win, and no other candidates has made such a pronouncement. But France’s ‘Françafrique’ policy of supporting its former African colonies is not popular – with both former President Sarkozy and President Hollande promising to end it – and irrespective of who wins France’s next presidential election, it is far from clear that Paris will continue to support the CFA Franc over the longer term.