Monetary policies that were effective in achieving real exchange rate depreciation also resulted in a reduction in government expenditures and a decline in investment. As a positive effect, the unlimited convertibility of the CFA franc to the euro has generally reduced the risk of foreign investment in CFA countries. Though, foreign investment in CFA countries remains low relative to other emerging economies, such as the BRICS economies that include South Africa.
Guinea, which has its own currency, still stands as an example for supporters of the CFA zone. Guinea frequently experiences currency shortages and its central bank does not have sufficient policies to ensure stability, so the CFA zone is presented as a solution to instability in this particular case.
Côte d’Ivoire president Alassane Ouattara has in the recent past contended that CFA zone countries are better off than Anglophone countries due to growth and low inflation, whereas the poor are disproportionately affected by unpredictable inflation in Anglophone countries. What is rarely discussed is that similar or better outcomes could be achieved with other policy options.
In terms of trade, the CFA’s fixed exchange rate to the euro has led to a greater facilitation of trade through the reduction of uncertainty and stabilization of domestic prices. The logic of fixed exchange rates traces back to the Bretton Woods period when 63% of developing countries had their currency pegged to that of an industrial country.
The potential problems with a fixed exchange rate are mostly offset in Central African Economic and Monetary Union (CAEMU) countries, due to these countries’ high levels of excess liquidity from oil revenues. However, West African Economic and Monetary Union (WAEMU) countries have experienced declining liquidity since 2004, thus suffering from the volatility of a fixed rate amidst external shocks.
Ideally, countries in the same monetary union should coordinate member countries’ fiscal policies to offset shocks in different parts of the union. However, no such coordination occurs in the CFA zone.
The CFA franc zone as a whole has thus resulted in:
- Limited intra-regional trade, especially in Central Africa.
- High dependence on producing and exporting a limited number of primary commodities.
- A narrow industrial base.
- A high vulnerability to external shocks.
A focus on primary commodities and limited intra-regional trade are broadly reflective of CFA franc member countries’ lack of export diversification and low industrialization. Intra-regional trade accounted for about 11% of total external trade of WAEMU countries, 6% of CAEMU countries, and only 9% of all CFA countries’ total external trade.
The French government again considered devaluation in 2012, which, while disregarded as a rumor, was assumed to be a method of safeguarding the euro and maintain France’s credit rating. The CFA franc’s exchange rate could thus become a pawn in international markets to the detriment of CFA economies. In 2014, a drop in oil prices increased fiscal and current-account deficits within the monetary zone. Though, African leaders agreed to IMF-supported programs that inspired spending cuts to remedy the deficits instead of changing the exchange rate. This adamant support for the CFA franc’s peg to the Euro challenges the perspective that only European leaders support the fixed rate of CFA francs to Euros.
Debates over the persistence of the CFA franc zone also focus on African states’ independence and sovereignty. Large numbers of unemployed youth throughout sub-Saharan Africa—which may reach over 350 million over the next two decades—are often the loudest opponents of the CFA zone. Other pro-democracy movements, like Y’en a Marre in Senegal and Le Balai Citoyen in Burkina Faso, consider the dismantling of the CFA zone as essential to their campaigns to reform their countries’ respective governments. Other protests have included Kemi Seba, the Benin-born French activist who was charged with burning CFA notes in Senegal before being deported.
Some African economists consider the broader dependency on European monetary policies as a restriction to growth due to a hyper-fixation on inflation. However, African elite and wealthy individuals, the primary beneficiaries of the CFA franc zone configuration, support its continuation. Thus, debates will continue within the various dimensions of class, power, and politics.
Scholars and policymakers have proposed several options to improve the viability of the CFA franc or replace the currency. Each option has advocates and opponents because the different policies target distinct challenges, such as exchange rate independence, inflation control, GDP-growth incentives, and capital mobility. The four most prominent options are to:
l. Tie the CFA franc to a basket of currencies, such as the dollar and the yuan. Pegging the CFA franc to multiple currencies will increase the relative stability of the currency in the event of exchange rate fluctuations of any of WAEMU or CAEMU’s trading partners.
A basket peg based on an import-weighted index, as proposed by Crokett and Nsouli (1977), has also been evidenced to be more beneficial for developing countries. An import-weighted index would be most beneficial for WAEMU due to its high levels of import diversification, while a different configuration, such as an export-weighted index, a bilateral trade index, or an index based on the SDR (special drawing rights) might be more appropriate for the CAEMU zone that is highly focused on primary commodities. Though, in general, severe depreciation of basket currencies would have much graver effects on countries that mainly export primary products, such as CFA countries.
2. Restructure the reserve requirements for CFA franc countries. Higher levels of reserves will ensure the convertibility of the CFA franc, which is currently threatened by changing French and European fiscal policies. This option could be considered a short-term strategy, or precursor to other strategies, that may lead to greater monetary independence for CFA countries. However, in many CFA member countries, high reserves are derived from natural resource revenues, which are subject to changes in world prices and difficult to accommodate in the short-term.
3. Separate WAEMU and CAEMU into optimum currency areas. Optimum currency areas (OCA) have the benefits of high factor mobility, economic interdependence, sectoral diversification, and wage and price flexibility. The challenge is to support the costs related to the establishment of OCAs and ensure the establishment and compliance of uniform regulations.
Though undoubtedly difficult to implement, this configuration could likely benefit both monetary unions because member states’ fiscal policies will be easier to coordinate within a similar regional context. Some research suggests West African CFA members of ECOWAS, the Economic Community of West African States, are already primed to become an OCA because these countries are best suited to integrate their real exchange rates. Although ECOWAS is mulling the launch of “Eco,” a new currency to be used by its 15 member states, including Nigeria, Aloysius Uche Ordu, former Vice President of the African Development Bank recently evaluated its prospects, and argues launching Eco by January 2020 “is, at best, an expensive distraction that the people of West Africa can ill afford at this particular moment”.
4. The establishment of the African Monetary Union. An African Monetary Union would be most challenging to implement and require countries to adhere to strict fiscal rules similar to the CFA zone until stability was achieved. This strategy requires significant investment and capital mobility to ensure a strong exchange rate union and currency convertibility. Movement of labor and capital are necessary to spur economic growth and stabilize relatively different economies. The appeal of an integrated African Monetary Union is the tremendous potential to increase intra-regional trade and encourage domestic production capabilities. However, another monetary union may lead to similar problems of dependence as the CFA franc zone.
Overall, policymakers from the CFA franc zone should analyze the various options to determine a short-term and long-term plan that will increase growth and lead to equitable development of countries that are at different stages. African and European leaders must be resolute and accountable to the various interest groups throughout their two continents.
Any restructuring of the CFA franc will have drastic macroeconomic effects that will require an increase to public investment and provision of public goods, attractive investment policies, development aid, and resource mobilization. The future of the CFA franc is yet to be determined, but it deserves comprehensive, sensitive analysis.