A gentle wind of change in the Franc Zone
Posted on 13th February, 2020 in Corporate News
The Franc Zone is vulnerable to the criticism that it is a colonial arrangement. It consists of fourteen countries on mainland Africa, all but two of which are former French colonies. (There is a separate arrangement with the Comoros.) The currency, the CFA franc, is issued by two central banks, headquartered in Dakar and Yaoundé, and pegged to the Euro (previously the French franc). It is effectively convertible, the price of which is the requirement that the two central banks deposit one half of their foreign-exchange reserves with the Banque de France. French officials sit on the boards of the two central banks and the respective monetary authorities.
The zone has seen one substantial change in its history of more than 70 years. This was the devaluation of January 1994 when the fixed exchange rate was adjusted from CFAF50 to CFAF100 per French franc. The current Ivorian president, Alassane Ouattara, was then a deputy managing director of the IMF. France and its African allies had waited until the death of the independence leader and Ivorian head of state, Félix Houphouët-Boigny, the previous month before pushing for the adjustment.
Now a more substantial change is in the air if we are to take at face value the musings of Ouattara and his French counterpart, Emmanuel Macron, in Abidjan in mid-December. The detail is thin, as we might expect, but it seems that the Union économique et monétaire ouest-africaine (UEMOA, the monetary authority for the eight West African states in the zone) is to have a new currency, the Eco.
French officials will no longer sit on the boards of UEMOA institutions, and the central bank for the eight states will no longer have to hold reserves at its French counterpart. In the initial stages, the currency is to remain pegged to the Euro before a move to a floating arrangement around a trade-weighted basket at an unspecified time in the future.
Pressure for change has been building in both France and Africa. Jacques Foccart, the legendary kingmaker and supreme fixit in francophone Africa, died in 1997 and the last president he served, Jacques Chirac, has also died. French government ministers no longer have family and business ties in the zone. Africa has become much less relevant to Paris economically and geopolitically. We can legitimately query the substance and coherence of Macron’s world view but it has no place for sentimental ties.
In West Africa the younger generation is increasingly questioning the historic close ties with France, notably the Franc Zone arrangements. The mandatory holding of reserves in France is a particular bone of contention. Alternative external partners without colonial baggage are growing in number, with Turkey and Brazil joining India, China and the US. The timing of Ouattara’s initiative is connected to the forthcoming Ivorian presidential election.
Change is coming, and it will be gradual in view of the various challenges ahead. The central bank for West African states has no experience of floating exchange rates, and would have to change its mindset and many of its senior personnel. The same can be said of the Central Bank of Nigeria, which manages the naira exchange rate.
There is no reason why a common, market-determined currency cannot be backed by pooled reserves held in Dakar. The room for error is huge however, and the central bank would have to up its game in terms of transparency and awareness of market dynamics. The Eco would surely depreciate once the peg is removed, and officials would have to develop a shared position on the desirable level of inflation. Indeed, a new skill-set to face the force of global markets would be required
We note that the Eco is also the proposed shared currency of the Economic Community of West African States, a sub-regional grouping of anglophone and francophone states that has made its mark in political and military fields but has achieved rather less economically. The race is on for which Eco first sees the light of day.
Finally, the project is set to develop more quickly in West than Central Africa, where political ties with France remain strong and governance is generally poor. Five of the six members of the UEMOA equivalent in Central Africa are oil producers with dollarized economies. Their needs are different to the tropical commodity producers in West Africa.