West Africa should break bond with euro to survive
Monetary system managed by the French Treasury, not a bank, is doing the region’s economies more harm than good
FRANCE’S colonial-era trade agreements with its former African colonies are undermining their policy independence, industrialisation and sovereignty. As part of the deal for the colonies to become independent, France in 1960 negotiated the Pacte Coloniale – sets of co-operation agreements covering security, economies, public projects, politics and culture, among others – which would determine the former colonies’ post-independence relationship with France.
One of the punishing colonial era agreements is France’s currency union with its former colonies.
The CFA franc was created in 1945, and is the common currency of 14 countries in West and Central Africa, of which 12 are former French colonies. Algeria, Morocco, Tunisian and Guinea quit the CFA arrangement after independence.
The CFA has been pegged to the French franc since 1948, and now is pegged to the euro.
The CFA franc zone operates as two distinct currency unions, with legal tender of each region’s CFA franc limited to the specific region. Each region has a central bank, which maintains parity with initially the French franc and, since January 1, 1999, with the euro. Capital can move freely within the region.
Each of the CFA regional central banks has an overdraft facility with the French Treasury. However, since 1973, the amount that the CFA regional banks can withdraw has been restricted.
The French Treasury centrally governs the monetary system.
The French government has permanent representatives on the boards of both CFA franc zone regional central banks.
To use the CFA franc, former colonies had to agree to use the French Treasury to manage the system. France’s central bank, the Bank of France, and the European Central Bank, are not managing the system. Francophone countries which are part of the CFA franc system have to deposit a large proportion of their foreign currency reserves with the French Treasury, to “stabilise” the monetary zone.
The Francophone African countries’ foreign exchange reserves are held in “special operations” by the French Treasury. When the francophone countries were still colonies, they had to put all their foreign exchange reserves in the French Treasury.
When the CFA came into operation, the colonies had to keep 65% of their assets in the operations account of the French Treasury.
Currently, the CFA franc members have 50% of their reserves in the French Treasury. The foreign exchange reserves of Francophone African countries held in the Bank of France by 2012 stood at $20 billion. It earns interest of 0.75%.
CFA franc members have to provide foreign exchange cover of 20% for sight liabilities. There was a cap on credit extended to each member country which was equivalent to 20% of the country’s public revenue in the year before.
Members of the CFA zone “borrow” from France at commercial rates if they want to access their foreign currency reserves. In practice, this meant that former French African countries, although supposedly independent, have restricted control over setting their domestic monetary policy – and therefore broader economic and development policy.
The CFA franc is currently pegged to the euro at a fixed rate calculated by the French Treasury. Only France can change the fixed exchange rate – CFA franc countries have little say in this.
When the European Central Bank increases interest rates, the CFA franc region central banks usually follow suit. Interest rates in the CFA franc zone are kept higher than those in the Eurozone region to prevent capital flight from the CFA franc zone.
Keeping CFA franc countries’ foreign exchange reserves in the French Treasury is not an effective use of scarce African finances which could be better used for industrialisation, infrastructure and economic and human capital development.
The CFA franc’s tie with the euro has clearly led to generally better fiscal discipline, relatively stable currencies, relatively lower inflation and lower interest rates than many other African countries.
However, Gabriel Fal, the founder of the CGF Bourse, a Senegalese investment and brokerage firm, wrote that the CFA franc’s tie to the euro restrict CFA franc countries from establishing independent monetary policies as they are locked into the monetary policies implemented by the European Central Bank.
Mamadou Koulibaly, the Speaker of the Ivory Coast Parliament, in his book The Servitude of the Colonial Pact points out that the CFA franc zone economies are under-financed, because of the restrictive eurolinked monetary policies.
Koulibaly said the level of financial development, which is the ratio between M2, the measure of money supply, and GDP, which is 26 percent for the West African Economic Monetary Union and 16 percent for the Central Africa Economic and Monetary Community, are substantially lower than the rest of Africa.
The region is also vulnerable to economic crises in the Eurozone. When France devalued the French franc by 50 percent in 1994 it destabilised the CFA franc zone’s economies.
Because monetary control lays with France, CFA zone countries cannot use monetary policy to respond to external shocks.
The post-independence CFA franc arrangement with the French franc and now the euro allows the easy repatriation of profits made in Francophone Africa by French and European companies back to France and Europe, rather than keeping it locally.
Most of the CFA countries export raw materials and import manufactured products. Because it is pegged to the euro, the CFA franc has been consistently overvalued, making exports from the CFA countries more expensive, and imports cheaper.
Rather than raw materials, African countries need to make and export value added manufacturing products which create more jobs.
An overvalued currency makes it more expensive to export valued added African products.
The CFA franc’s attachment to the euro has led to structural current account deficits in many CFA franc countries.
Sanou Mbaye, a Senegalese economist, said the “convertibility of the CFA franc and its free transferability, combined with high interest and exchange rates, keep the franc zone countries in a state of structural deficit that render any development policies irrelevant”.
Notwithstanding the CFA franc zone, trade within the region is only 20 percent of total trade. There has to be a greater effort to promote trade within the CFA franc region.
The CFA integration with the Eurozone has undermined Francophone African countries’ economic integration with fellow African countries.
French President Emmanuel Macron has announced it will depend on individual African countries on whether they want to leave the CFA arrangement.
Unless African Francophone countries break the colonial-era unequal bondage with France, they will remain underdeveloped.
• William Gumede is chairperson of the Democracy Works Foundation. His most recent book is Restless Nation: Making Sense of Troubled Times
BONDS: French President Emmanuel Macron hugs Chad’s President Idriss Deby during a G5 Sahel summit, in Bamako, Mali.