The end of the West African CFA franc
As of this month, the West African CFA franc is supposed to be replaced by a new currency. In many respects the move looks symbolic – though it has still created waves in the region
When France pulled out of its African colonies in the 1960s, it retained its grip on power through currency control, backed by a military interventionist presence, which all but guaranteed that the former colonies would be the chasse gardée, or private hunting preserve, of French companies.
For some years now, though, France’s military and economic dominance has been in decline. Its monetary influence, too, may be on the wane, with July set to mark, in theory at least, the beginning of the end of the West African CFA franc — common currency in eight former colonies.
In December the presidents of Ivory Coast and France, Alassane Ouattara and Emmanuel Macron respectively, announced that the West African CFA franc would be replaced with a new regional currency, the eco, under the West African Economic & Monetary Union (Uemoa).
The announcement unleashed a storm of debate over currency sovereignty in West Africa, not least because it took the wind out of the sails of the Economic Community of West African States (Ecowas). That body — which includes the eight Francophone states of Uemoa — already had plans, through the West African Monetary Zone (Wamz), to launch a regional currency, also called eco. Once launched, that eco was supposed to merge with the West African CFA franc.
At an extraordinary meeting of the Wamz heads of state and government last week, Nigeria’s President Muhammadu Buhari criticised Uemoa for jumping the gun, warning that Ecowas’s plan for a regional currency could be in "serious jeopardy" if member states did not comply with already agreed processes.
With various sticking points — not least of which is that Uemoa states, for the most part, don’t meet the criteria to convert their currency to the France-backed eco — the move is looking largely symbolic.
The CFA franc has enjoyed remarkable stability since its launch in 1945 as a result of its peg to the French franc, and later to the euro. Its exchange rate has changed only once: in 1994, the International Monetary Fund (IMF) and the French treasury forcibly devalued it by 50%. But its sustained overvaluation has hurt CFA zone exports by undermining their competitiveness, and restricted credit to and investment in local economies — all of which have limited growth.
Yet under Uemoa’s agreement with France, the eco will remain pegged to the euro, and France will continue to guarantee the currency’s convertibility — which will require foreign reserves to be pooled collectively.
It’s not quite the flexible exchange rate and currency independence Ecowas had planned. As Rand Merchant Bank analyst Daniel Kavishe tells the FM: "Remaining pegged [to the euro] would mean that a separate approach is being taken from what was the initial intention for the region at large."
At the same time, Sven Richter of Drakens Capital tells the FM that while the CFA franc has "[limited] the countries in terms of their ability to conduct monetary policy", an independent, flexible regional currency would have a mixed impact on the very different economies of West African countries.
As was the case with the launch of the eurozone, he says, countries would need to "allow for the repricing of their outputs via a weakening currency", and the weak national economies in West Africa would not be able to be bailed out, because the region simply would not possess sufficient reserves.
Nigeria’s opposition also poses a problem. On the one hand, any regional monetary bloc that excludes an economy as large as Nigeria’s runs the risk of not being able to achieve its regional trade and integration objectives.
On the other hand, having the fortunes of smaller economies tied to that of Nigeria is risky: the country produces 70% of regional output, but its economy is tightly bound up in the volatile oil price.
There may be a further early downside to currency independence. Richter argues that the benefit of a central currency is "lower interest rates than the countries would achieve [on their own]".
He says: "So, in many ways, the countries are in a bind: to achieve currency independence they would most likely move to higher interest rates, [which] would reduce their GDP growth.
"This may be why the move [to the eco] is a small one, in effect. If they want full currency independence, it will come one step at a time."
Perhaps more significant is the severing of some ties with France. By far the most controversial aspect of the CFA arrangement with France was the requirement that issuing states were initially required to deposit all their foreign reserves in the French central bank. The requirement was lowered to 65% under amended treaties in the early 1970s, and further reduced to 50% in 2005.
But read with the fact that French managers were imposed on the ruling committee of West Africa’s central bank, it in effect meant that African taxpayers funded public works projects in France decades after they had attained flag independence.
Those deposit and co-management requirements will now come to an end — though, again, this may be a more symbolic than a practical change.
"The move of the reserves, while a powerful message ... will not have much effect, as the reserves, by their nature as reserves, are insulated from being used within the local economy," says Richter. "Or at least [they’re] supposed to be insulated, and I am sure that if the peg to the euro is to be maintained there will be an agreement of how the reserves will be protected."
There are other concerns too. After the eco was announced, Senegalese economist Ndongo Samba Sylla told Radio France Internationale that while France claims it will guarantee the convertibility of the eco to the euro, he believes any economic crisis in the region will cause the European power to bow out — which means the IMF will have to step in as disciplinarian caretaker.
Under the currency agreement for the new France-backed eco, countries need to meet set criteria to join the common currency zone: a deficit of less than 3% of GDP, inflation of no more than 10% and debts amounting to less than 70% of GDP.
Richter says he’s not convinced the countries can achieve or maintain these ratios. In fact, Togo is the only country of the Francophone west that nears compliance with the conversion requirements.
"At this stage, if they choose to go down this route, given the impact that Covid-19 is having on financial markets, it will likely be a name change [only]," says Kavishe. "What was intended by the Wamz was an eco with a flexible exchange rate. At this stage, most countries haven’t been able to meet the requirements. A nominal name change seems [the] most likely scenario, given the times."
In their 2018 book Pigeaud argue that the imposition of the CFA franc — "a formidable sleight-of-hand" — was the most powerful of three elements France used to retain control over its former colonies. The others were its military presence in Africa and the purchase of influence — a covert arrangement called la valise (the suitcase).
Militarily, France had as many as 20,000 French soldiers stationed in Africa in the 1960s; by August 2019 there were only 8,700, and only half of them were permanent.
According to Anna Sundberg of the Swedish Defence Research Agency, under mutual defence agreements France continues to maintain two primary bases at Djibouti and Abidjan, two regional co-operation bases at Dakar and Libreville, a defence base on Réunion and a naval base off northern Mozambique. Under Macron’s presidency it also runs two large operations: one focused on maritime security in the piracy-infested Gulf of Guinea, and the other on counter-terrorism in the Sahel.
But on the whole the country’s military presence in Africa has been reduced to second-fiddle status, as it is increasingly reliant on the US for logistical support.
The "suitcase system" was always more curious, suggesting something of a reversal of colonial relations. Millions of francs extracted from the economies of Burkina Faso, Congo-Brazzaville, the Ivory Coast, Equatorial Guinea, Gabon and Senegal were sent to France in suitcases. These were used to fund the election campaigns of a series of French conservative candidates committed to propping up African strongmen whose regimes would be granted debt relief if "their" candidate was successful.
As Prof Stephen Smith, former Africa editor of French newspaper Libération, said a few years ago, there was "a long continuity of the practice" dating back to the late 1950s — with "a continuity of conservative governments" installed, in part, through la valise. "This amounts to a postcolonial informal state, not on paper, but in practice," he said.
La valise operated into at least the mid-2000s thanks to facilitator Robert Bourgi, who ran the system until its exposure forced a nervous administration of then president Jacques Chirac to supposedly bring it to a halt in 2005.
Yet astounding 40% debt reductions awarded by President Nicolas Sarkozy’s administration to Gabon and Congo led some observers to question whether suitcases didn’t continue to change hands into the early 2010s at least.
Now, however, with Chinese, Indian and SA influence on the rise in Africa, French companies’ chasse gardée no longer boasts exclusivity.
Which is, perhaps, why France has supported Uemoa’s pre-emptive currency move.
Samba Sylla is cynical. He believes the CFA franc and its successor, the eco, amount to "more than a symbol of the monetary system". They are designed, he says, "to organise African countries in a way that benefits the interest of French businesses, French government and more generally European businesses".
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