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European Economic Integration and the Franc Zone: the Future of the Cfa Franc After 1996 NINETEEN EUROPEAN ECONOMIC INTEGRATION AND THE FRANC ZONE: THE FUTURE OF THE CFA FRANC AFTER 1996 ALLECHI M'BET and AMLAN MADELEINE NIAMKEY AFRICAN ECONOMIC RESEARCH CONSORTIUM CONSORTIUM POUR LA RECHERCHE ECONOMIQUE EN AFRIQUE European economic integration and the Franc Ion©: the future ©f the CFA franc after 1996 Part I: Historical background and a new evaluation of monetary co-operation in the CFA countries Other publications in the AERC Research Paper Series: Structural Adjustment Programmes and the Coffee Sector in Uganda by Germina Ssemogerere, Research Paper 1. Real Interest Rates and the Mobilization of Private Savings in Africa by F.M. Mwega, S.M. Ngola and N. Mwangi, Research Paper 2. Mobilizing Domestic Resources for Capital Formation in Ghana: the Role of Informal Financial Markets by Ernest Aryeetey and Fritz Gockel, Research Paper 3. The Informal Financial Sector and Macroeconomic Adjustment in Malawi by C. Chipeta and M.L.C. Mkandawire, Research Paper 4. The Effects of Non-Bank Financial Intermediaries on Demand for Money in Kenya by S.M. Ndele, Research Paper 5. Exchange Rate Policy and Macroeconomic Performance in Ghana by C.D. Jebuni, N.K. Sowa and K.S. Tutu, Research Paper 6. A Macroeconomic-Demographic Model for Ethiopia by Asmerom Kidane, Research Paper 7. Macroeconomic Approach to External Debt: the Case of Nigeria by S. Ibi Ajayi, Research Paper 8. The Real Exchange Rate and Ghana's Agricultural Exports by K. Yerfi Fosu, Research Paper 9. The Relationship Between the Formal and Informal Sectors of the Financial Market in Ghana by E. Aryeetey, Research Paper 10. Financial System Regulation, Deregulation and Savings Mobilization in Nigeria by A. Soyibo and F. Adekanye, Research Paper 11. The Savings-Investment Process in Nigeria: an Empirical Study of the Supply Side by A. Soyibo, Research Paper 12. Growth and Foreign Debt: the Ethiopian Experience, 1964-86 by B. Degefe, Research Paper 13. Links Between the Informal and Formal/Semi-Formal Financial Sectors in Malawi by C. Chipeta and M.L.C. Mkandawire, Research Paper 14. The Determinants of Fiscal Deficit and Fiscal Adjustment in Cote d'lvoire by O. Kouassy and B. Bohoun, Research Paper 15. Small and Medium-Scale Enterprise Development in Nigeria by D.E. Ekpenyong and M.O. Nyong, Research Paper 16. The Nigerian Banking System in the Context of Policies of Financial Regulation and Deregulation by A. Soyibo and F. Adekanye, Research Paper 17. Scope, Structure and Policy Implications of Informal Financial Markets in Tanzania by M. Hyuha, M.O. Ndanshau and J.P. Kipokola, Research Paper 18. African Economic Research Consortium, 1993 Edited and typeset by the Centre for the Study of African Economies, University of Oxford, St Cross Building, Manor Road, Oxford, 0X1 3UL, England. for the African Economic Research Consortium, P.O. Box 62882, Nairobi, Kenya. Printed by Zakuna Printers Ltd. P. O. Box 45804, Nairobi, Kenya. British Library Cataloguing-in-Publication Data. A catalogue record for this book is available from the British Library. ISBN 1-897621-11-6 European economic integration and the Franc Zone: the future of the CFA franc after 1996 Part I: Historical background and a new evaluation of monetary co-operation in the CFA countries Allechi M'bet Universite Nationale de Cote d'lvoire and Amlan Madeleine Niamkey Universite Nationale de Cote d'lvoire AERC Research Paper 19 African Economic Research Consortium, Nairobi July 1993 Contents List of tables List of acronyms Acknowledgements Introduction 1 I The history of the Franc Zone 3 History and current institutional arrangements 3 Current institutional arrangements of the Franc Zone 6 Advantages of the Franc Zone JI Disadvantages of the Franc Zone 11 The development of 1'esprit de facilite ] 1 The domination and extroversion of the economies of member states 12 The impact of French Franc devaluation 12 European monetary integration 13 History of the EMS 14 Main features of the EMS 14 The achievements of the EMS ] 4 Evolution of the EMS towards a European monetary union 15 II A new evaluation of the CFA monetary co-operation system 17 The recent economic situation of the CFA countries \ 8 Economic structure and situation of UMOA Zone countries 18 Economic structure and situation of BEAC Zone countries 21 The gains from pooled reserves: a theoretical analysis and its application to the Franc Zone 25 Measuring the gains from pooling reserves 26 Gains from pooled reserves in the Franc Zone 28 Gains from pooled reserves in UMOA 29 Gains from pooled reserves in BEAC 33 More on the gains from pooled reserves on a country basis 40 The total net gains from Franc Zone membership 56 Relationship between the operations account and debt 58 III Is the Franc Zone an optimum currency area? 66 Mundell's analysis of optimum currency area theory 66 A definition of an optimum currency area 67 Implications of optimum currency area theory 67 Advantages of an optimum currency area 69 Disadvantages of an optimum currency area 69 Criticisms of Mundell's theory of the optimum currency area 70 Theory and the Franc Zone 72 References 74 List of tables 1. General indicators for UMOA countries (1988) 18 2. Percent share of total foreign reserves in GDP in UMOA 22 3. General indicators for BEAC Zone countries (1988) 23 4. Evolution of the operations account in UMOA countries 30 5. Variability of the operations account in UMOA 32 6. Gains from pooled reserves in UMOA 32 7. Coverage rate without pooling of each country in UMOA 34 8. Average coverage without pooling in UMOA countries 35 9. Coverage rate with pooling in UMOA 36 10. Hypothetical reserves out of the pool for UMOA countries 1978-88 37 11. Evolution of the operations account in BEAC countries 38 12. Variability in the operations account in BEAC 38 13. Aggregate gains from pooled reserves in BEAC 39 14. Coverage rate without pooling in BEAC 40 15. Coverage rate with 65% pooling in BEAC countries 41 16. Average coverage with and without pooling in BEAC 41 17. Hypothetical reserves for BEAC countries 42 18. Average hypothetical reserves in BEAC countries 42 19. Reserves savings from pooling in UMOA countries 43 20. Reserves savings from pooling in BEAC countries 44 21. Overall balance of operations account in UMOA and BEAC 45 22. Costs of the pooled reserves associated with the interest rate in UMOA 48 23. Costs of the pooled reserves associated with the interest rate in BEAC 49 24. Exchange rate costs of pooled reserves in UMOA 51 25. Exchange rate costs of pooled reserves in BEAC 52 26. Net gains (losses) in UMOA 53 27. Net gains '(losses) in BEAC 54 28. Comparative evolution between the average intervention rate of Banque de France and LIBOR 55 29. Percent share of export destinations and import origins in UMOA and BEAC countries (1988) 56 30. The state and the evolution of net transfers in UMOA countries 59 31. The state and the evolution of union membership gains in UMOA countries 60 32. Operations account and debt in UMOA 62 33. Operations account and debt in BEAC 64 34. Correlation coefficients between debt and the operations account in UMOA by country 65 35. Correlation coefficients between debt and the operations account in BEAC by country 65 36. Mundell's model of the theory of optimum currency areas 68 List of acronyms AEF Afrique Equatoriale Fran9aise (French Central Africa) AOF Afrique Occidentale Frangaise (French Western Africa) BAO Banque de 1'Afrique de l'Ouest (Central Bank of West Africa) BCEAO Banque Centrale des Etats de l'Afrique de l'Ouest (Central Bank of West African States) BEAC Banque des Etats de l'Afrique Centrale (Bank of Central African States) CAR Central African Republic CEL Cocoa-Export Limited CFAF Franc de la Communaute Financiere Africaine (African Financial Community franc) or Franc de la Cooperation Financiere Africaine (African Financial Cooperation franc) EC European Commission ECU European currency unit EEC European Economic Community EMS European Monetary System ESCB European System of Central Banks FZ Franc Zone IRFCE Average intervention rate of Banque de France LIBOR Reference rate (London Inter Banking Official Rate) SSA Sub-Saharan Africa TOM-DOM French Overseas Territories and Departments UDEAC Union Douaniere des Etats de 1'Afrique Centrale (Customs Union of Central African States) UMOA Union Monetaire Ouest Africaine (West African Monetary Union) Acknowledgements We are grateful to the participants of various African Economic Research Consortium (AERC) meetings for useful comments. Special thanks go to Professor Gerry Helleiner for putting us in touch with Dr Rohinton Medhora of the University of Toronto, who wrote a thesis on the CFA Franc Zone, and to Professor Tony Killick for sending us up-to-date materials. Their continuous support during the execution of this project has been most helpful. We very much appreciate the secretarial services of Ms Sopie Germaine Amangoua. Introduction This paper is concerned with the future of the Franc Zone (FZ) and of the CFA franc in the event of integrated European monetary union. The year 1992 has been set as the date for full economic integration in Europe. Certain conditions have yet to be met in order to achieve a European Central Bank with a unique currency, but nevertheless the goal is monetary unification. Accordingly, research should anticipate the expected impact on the EEC partners. Among those partners, there is an important subset of countries in Sub-Saharan Africa (SSA) which are part of a monetary co-operation system, the FZ, in which France guarantees the common monetary unit, the CFA franc, through special institutional arrangements. But France is also a member of the EEC so that any monetary reshaping within the EEC will ultimately affect the FZ and, in turn, the CFA franc.
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