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The CFA Franc and the Question of Monetary Sovereignty

July 9, 2024
Writer(s): Amery Atinon

Cover image source: DW

The French Empire once dominated Western and Central Africa, encompassing the territories of thirteen modern day sub-Saharan countries. Following the independence of their African colonies, France maintained a strong economic and military presence in Africa. France’s continued influence in Africa has been called “Françafrique,” a term used pejoratively by the many parties who oppose France’s neo-colonialist ambitions. 

One of the most influential institutions left behind by the French is the franc zone, a currency union composed of the West African CFA franc (XOF), which covers eight nations, and the Central African CFA franc (XAF), which covers six nations. Both francs are interchangeable and are pegged to the euro (they were previously pegged to the French franc). They are also controlled by the French treasury, which can change the value of both currencies on a whim.

The CFA franc plays a major role in stabilising the economies of many countries, facilitating trade and keeping inflation under control. In an era where greater sovereignty has been demanded by the inhabitants of West and Central Africa, however, many see the franc as a shackle from a painful colonial past.

The CFA franc as a stabiliser of African economies

Ghana was once hailed as one of West Africa’s strongest economies, boasting high gold and cocoa exports along with a relatively stable political climate. In October 2023, protestors took to the streets of Accra, Ghana’s capital, over the loss of 60 billion Ghanaian cedis (amounting to around US$5.2 billion) resulting from illegal money printing by the Bank of Ghana. This incident has resulted in inflation rates of up to 54%.

This story is not unique to Ghana, however. Nigeria has been experiencing similar protests over soaring food prices. Guinea has had inflation rates of around 10% per year. Macroeconomic instability has become a feature of many nations within the region, with high fluctuations in indicators such as inflation and perceived corruption.

Neither Ghana nor Nigeria are part of the franc zone, both being former English colonies. Guinea famously rejected being part of France’s African community in 1958. This provides a strong contrast with the CFA, as no member of the franc zone “has experienced a major financial crisis.”

 

Inflation rates in franc zone countries such as the Central African Republic, Senegal, and Burkina Faso tend to be lower than others in the region. Source: IMF Data Mapper

It is claimed by many proponents of the franc that it allows for economic stability in an otherwise unstable and insecure region. The franc has two main benefits: stable inflation and easier trade.

Both West Africa and Central Africa each have a central bank which has an operating account with the French treasury. This account is essentially a “credit mechanism organized by France” through which these countries can access international capital markets. To encourage financial discipline, the French treasury requires that each bank:

  1. Keeps at least 50% of its foreign assets in its operating account with the French treasury.
  2. Keeps a foreign exchange forward contract for at least 20% of its at sight liabilities.
  3. Limit credit for a member country to a ceiling of 20% of their government’s revenue in the previous year.

The precautions taken by the French treasury have created an economically stable environment for West and Central Africa. During the COVID-19 pandemic, franc zone countries recorded an average 0.3% GDP growth in 2020 compared to a 1.7% recession in the rest of sub-Saharan Africa. 

The franc allows for easier trade both within the monetary union and with the European Union, increasing trade intensity within the region. Transaction costs associated with international trade are eliminated in the franc zone due to both the XOF and XAF being easily convertible. It is worth noting, though, that the convertibility of the franc heavily incentivises trade between these African countries and the European Union, leaving out trade opportunities they may have with other regions and nations.

The erosion of sovereignty in Françafrique

Over the years, there have been growing calls to end the franc. Beninese activist Kemy Seba set a 5,000 CFA franc note on fire in Senegal, protesting “Françafrique.” These tensions played a major role in what is called the Coup Belt–a region which includes five franc zone members: Chad, Niger, Mali, Gabon, and Burkina Faso. All five countries have experienced at least one coup since 2020, with the franc and France’s continued influence being motivations for several.

While the franc has benefits in terms of macroeconomic stability, the relationship between France and its former colonies seems one-sided. Due to the rules stipulated by the French treasury for the West African and Central African banks, France kept over 10 billion euros worth of African assets. Government debt in franc zone countries is typically lower than others in the region due to restrictions placed by the French treasury on these governments. While these are certainly beneficial for stability, government debt is still important for growth.

GDP per capita in West and Central Africa, even for robust economies such as Senegal, grows slowly. Source: IMF Data Mapper

The lack of monetary sovereignty has several negative effects. Franc zone countries are unable to adjust interest rates, meaning that they are also unable to incentivise growth in small businesses. Having a peg to a strong currency like the euro means that both the XOF and XAF are overvalued, making imports cheaper and exports more expensive. This results in imports outcompeting fledgling businesses in both West and Central Africa. 

The many issues inherent with the franc have led many governments to work towards its abandonment. In 2019, the 50% foreign assets policy was ended in an agreement between Ivorian president Alassane Ouattara and French president Emanuel Macron. Senegal, a regional leader in West Africa, has elected the left wing Bassirou Diomaye Faye, who promises Senegalese sovereignty

A common currency called the eco is to be adopted by the members of the Economic Community of West African States (ECOWAS) by 2027, replacing the XOF. These reforms, however, are symbolic: while reserves will now be stored in an ECOWAS bank, France still acts as their guarantor. The main difference is that the obligation to bail out franc zone countries will fall on the International Monetary Fund (IMF) instead of France. 

In addition, a fixed exchange rate with the euro is to be imposed, not unlike the franc. These reforms still do not grant sovereignty to ECOWAS members in terms of exchange rate and monetary policy, which straitjackets economic growth. While economic stability is maintained, this means little for growth: Ghana, a country outside the franc zone, has had significantly higher foreign direct investment than any other country in the region prior to its inflationary crisis.

Conclusion

The CFA franc is a relic of colonialism that certainly brings much-needed stability to both regions, keeping inflation low and facilitating international trade. The many restrictions that come with the currency also restrict long-term economic growth, potentially keeping the industries and population of these countries poor. Current reforms seem to be purely symbolic, however, meaning that the region’s dependence on France will continue.

Françafrique is an incredibly diverse and fascinating region, with each country having its own capabilities and weaknesses. Each member state of the franc zone has large deposits of natural resources and a young and productive population. Increased sovereignty can grant these countries control of their future. Whether the path they go down leads to prosperity or ruin, only their choice will tell. Whether the path they choose leads to prosperity or ruin, it remains to be seen.

 

 

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Meet our authors:

Amery Atinon
Writer

I am a 2nd year BCom student majoring in Finance and Management. I am a Filipino student with an interest in global affairs, geography, and international relations, and how these affect economic policy. I also love traveling and collecting playing cards.