Last December, President Emmanuel Macron of France, standing next to President Alassane Ouattara of Ivory Coast in Abidjan, announced the end of an era. After 65 years, the CFA franc would cease to exist for eight African countries, seven of them former French colonies. It would be replaced by the “eco”, which would stay pegged to the euro, but less directly supervised by Paris. Many in west Africa said good riddance to what they deemed a “colonial relic”. One French newspaper declared: “The CFA franc is dead.”
That is overstating it. The CFA franc is gone in name, but remains in substance. France will continue to guarantee the euro peg and step in if there is a reserves crisis. Besides, the CFA franc will still be used by another bloc of six countries in central Africa, which operates a parallel currency zone.
Still, the announcement has huge symbolic value both in west Africa and France, which maintains close ties with its former colonies. Under President Macron, France has sought to recast its relationship with French-speaking Africa where many regarded the CFA franc as not only a symbol of France’s continued hegemony, but also as an instrument of financial exploitation.
Detractors argued that, by overvaluing the CFA franc, French businesses were assured of profits while African industrialisation was strangled at birth. They objected to a proviso that African states keep half their reserves with France’s central bank, a stipulation that has now been scrapped. Nor will a French official any longer sit on the west African regional central bank’s board.
On balance, a new currency regime is desirable. But now that the eight African countries — Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo — have won a degree of autonomy, they need to decide what to do with it. The new regime has got off to a rocky start. Anglophone states — including Ghana and Nigeria — have denounced the use of the word “eco”, which had been intended for an as yet unrealised common currency for all west Africa. The concept of a region-wide currency, however, is problematic. Nigeria is an oil-dependent state with economic output equal to three-quarters of the entire region. Combining Nigeria’s naira with a broader regional currency is, for now, a bad idea.
That still leaves the question of how the eight countries should manage their new currency. One option is to move the peg to a basket of currencies that better reflects new trading patterns. China is a much more important trade and investment partner than when the CFA franc was established in 1945. Other countries, European and Asian, have eaten into France’s once unassailable position. Moving to a basket that reflects these changes makes sense, though no such move should be made at the cost of French or alternative backing for the currency.
Inevitably some will push for the new currency to be floated, but supreme caution is required. Francophone countries have derived significant benefit from currency stability whatever the critics say. When Ivory Coast went through two civil wars, the peg held firm. The economy has bounced back spectacularly since, growing at an average of 8-9 per cent for nearly a decade. Currency stability brings borrowing rates several percentage points below historically more volatile currencies, including the naira. Predictability encourages investment. Senegal has an investment rate to output of 26 per cent versus 13 per cent for Nigeria. The argument that the CFA franc has hampered development is overdone. Playing with currency stability would be risky to say the least.
Source: Economy - ft.com
