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

African Independent - - OUTLOOK -

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

PIC­TURE: CHRISTOPHE ARCHAMBAULT/AFP

BONDS: French President Em­manuel Macron hugs Chad’s President Idriss Deby dur­ing a G5 Sa­hel sum­mit, in Ba­mako, Mali.

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