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The CFA Franc: Zone of Fragile Stability in Africa

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The CFA Franc: Zone of Fragile Stability in Africa The CFA Franc: Zone of Fragile Stability in Africa JAMES M. BOUGHTON Uganda to 1.7 percent appreciation in microcosm of that choice: 34 out of the 50 he CFA franc zone is a Rwanda. countries for which data are available have This last statistic—the behavior of the ex- some sort of pegging arrangement. Two peg currency union linked change rate—may be the most esoteric, but it to the South African rand, five to the US dol- to the French franc. If illustrates a key difference in the way coun- lar, 13 to the SDR or other basket, and 14 to T tries have responded to the difficulties of the the French franc. It is this last phenomenon viewed as a monetary past decade. The exchange rate plays two that is of interest here: Does it make sense to- union alone, it does not appear very important but conflicting roles in eco- day for a large and diverse group of African to be close to an optimal cur- nomic policy. It can serve as an anchor for fi- countries to peg firmly to a single European nancial stability: If a country can run finan- currency, or is that arrangement a historical rency area. When viewed as cial policies so as to be consistent with accident that could unduly constrain eco- part of a wider franc zone, how- exchange rates that are stable against key nomic policy? currencies, then that country will gain credi- ever, its viability and its benefits bility and will promote confidence in its econ- What is the CFA franc zone? become clearer. omy. However, the exchange rate is also an The CFA franc zone is an outgrowth of the instrument of external adjustment. If a coun- economic and financial arrangements under try that has allowed wages and prices to which France administered its colonies. Prior Most of the more than 50 countries in Africa get too high can reduce their real value to World War II, French colonies typically are poor, and all have faced enormous chal- through exchange rate depreciation, then that maintained their own currencies at parities lenges during the past decade. Their eco- country will gain international competitive- that were firmly linked to the French franc. nomic performance and policies have never- ness. Because these linkages are complex and After the war, the system was simplified by theless been quite diverse. Output per capita uncertain, and because financial stability and consolidating the currencies of colonies in the in 1989 ranged from less than $100 in competitiveness are both prerequisites for Pacific region into a single currency known as Mozambique to more than $5,300 in Libya. sustainable real economic growth, there is no the CFP franc ("le franc des Colonies The annual inflation rate for the 1980s ranged single "right" approach to exchange rate pol- Francaises du Pacifique") and all others (most from negative 1 percent in Chad to 108 per- icy. of which were in Africa) into CFA francs ("le cent in Uganda. The percentage of output de- Roughly two thirds of all developing coun- franc des Colonies Francaises d'Afrique"). In rived from manufacturing in 1989 ranged tries in the world have chosen to favor stabil- each case, the currencies were fully convertible from 4 percent in Tanzania to 25 percent in ity over flexibility by pegging their exchange into French francs at the fixed parity. Each Zimbabwe. Total external debt at the end of rates to a single currency or to a basket of participating central bank established an "op- 1989 ranged from the equivalent of seven currencies, or (in a few cases) by intervening erations account" at the months' export receipts in Mauritius to 270 in exchange markets so as to limit flexibility French Treasury, into months in Somalia. And the average against a currency. Africa is a which it deposited annual rate of change in the ex- most of its foreign change rate against the SDR for the 1980s ranged from nearly 135 percent depreciation in ©International Monetary Fund. Not for Redistribution exchange. Convertibility was guaranteed Mali, Niger, Senegal, and Togo—use curren- rules do not dictate a strict ceiling on total do- through rules permitting overdrafts on these cies known as the "franc de la Communaute fi- mestic credit growth, but they do impose a accounts, if necessary. This system permitted nanciere d'Afrique." They have formed a re- strong measure of financial discipline. the free mobility of capital throughout the gional association, the West African zone, and it encouraged the growth of interna- Monetary Union (WAMU), and have vested How well does the system work? tional trade by instituting common trade and authority to conduct monetary policy in a The effectiveness of the zone's arrange- financial policies. These principles continue to common central bank, the Banque Centrale ments has been subjected to much scrutiny in govern the CFA franc zone. des Etats de I'Afrique de 1'Ouest (BCEAO). the past few years, owing to the severe and The most remarkable feature of the CFA The six members in central Africa prolonged deterioration in economic perfor- franc zone is that the exchange rate against —Cameroon, the Central African Republic, mance since the mid-1980s. The currency has the French franc has not changed for more Chad, the Congo, Equatorial Guinea, and on occasion come under speculative attack in than 40 years. There was some initial instabil- Gabon—use the "franc de la Cooperation fi- the form of capital flight, in response to ity immediately after the war, and the rate nanciere en Afrique centrale," and have their rumors of impending devaluation. The coun- was then set at 0.5 CFA franc per French own central bank, the Banque des Etats de tries concerned have responded, most recent- franc. In 1968, France effected a currency re- I'Afrique Centrale (BEAC). ly in meetings at both ministerial and head- form and issued new francs at the rate of 1 per Along with these political and institutional of-state level during the summer of 1992, by 100 old francs; the value of the CFA franc was changes has come an increasing degree of eco- seeking to strengthen rather than abandon left unchanged, so the exchange rate became nomic diversification. From the mid-1960s to the arrangements. Notable proposals to 50 CFA francs per new French franc, where it the mid-1980s, the portion of the zone's inter- emerge from those meetings include plans to remains as of 1992. national trade that was with France dropped establish intergovernmental councils for coor- There have been some important institu- from nearly 50 percent to around 30 percent, dination of monetary, fiscal, and related tional changes over the years, however, re- with other European countries taking up macroeconomic policies and to promote real flecting the political and economic turbulence much of the difference. Over the same two (in addition to monetary) integration of the that this region of the world has experienced. decades, the share of food products and agri- region. Such efforts will succeed in the long First, the number of member countries has cultural materials in the zone's exports run only if the zone itself is a sensible fluctuated. In the first 30 years, several dropped from 75 percent to less than 50 per- response to economic condition. countries—mostly those that are not contigu- cent, with petroleum and other mineral prod- One way of analyzing the effectiveness of ous to the others—such as Madagascar and ucts taking up the difference. Nine different the CFA franc zone is to ask how well it fits Djibouti—left the zone to establish indepen- products constitute the dominant export com- the usual criteria for a successful currency dent currencies or to adopt the French franc. modity for the 13 countries. For seven coun- union. These criteria include factors such as In the 1980s, however, the trend in member- tries, minerals are the largest export, and for the degree of flexibility of wages and prices; ship was reversed, as Mali rejoined in 1984 af- five others, agricultural materials (cotton and the degree of labor mobility; the similarity ter an absence of 22 years, and Equatorial timber). For only two countries were food between countries in the effects from external Guinea in 1985 became the first member coun- products the dominant export in the mid- disturbances; and the degree of intraregional try without colonial (or even close economic) 1980s: cocoa from Cote d'lvoire and fish from trade. There are positive, aspects on each ties to France. Since then, there have been 13 Senegal. With this diversity have come dis- front, but on none of these economic grounds member countries in the zone, forming a con- parities in per capita output, ranging from would the zone appear to be a natural candi- tiguous group across the equatorial region of less than $200 a year in cotton-producing date for a common currency area. west and central Africa. (The 14th African Chad to more than $3,000 in petroleum-rich country pegged to the French franc is the Gabon. Downward flexibility of prices and wages Comoros, which has an independent currency There are three basic mechanisms for con- is inherently limited in all parts of the world fixed at the same parity as the CFA franc; trolling monetary growth in the CFA franc economy. If prices and wages were highly elsewhere, French Polynesia, New Caledonia, zone. First, interest is charged on overdrafts in flexible, the optimum arrangement would be and Wallis and Futuna Islands use the CFP the operations accounts (and interest is paid to promote financial stability and the growth franc, with a different fixed parity.) on credit balances).
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