The Future of the CEMAC CFA Franc

Global EconomyGlobal Economy and Development at BROOKINGS Policy Paper 2012-06 and DevelopmentGLOBAL VIEWS at BROOKINGS The Future of the CEMAC CFA Franc Julius Agbor Agbor Africa Research Fellow, Africa Growth Initiative Global Economy and Development Brookings Institution DECEMBER 2012 THE BROOKINGS INSTITUTION 1775 MASSACHUSETTS AVE., NW WASHINGTON, DC 20036 2 An earlier draft of this paper was presented as a speech to the Distinguished Annual Congress of the Cameroon Professional Society, held July 27-28 in Baltimore, Mary- land. I want to particularly thank Anne-Marie Gulde-Wolf, deputy director of the Af- rican Department at the IMF, and an anonymous referee for their insightful comments and suggestions. The research assistance of Brandon Routman is gratefully acknowl- edged. The Brookings Institution is a private non-profit organization. Its mission is to conduct high-quality, independent research and, based on that research, to provide in- novative, practical recommendations for policymakers and the public. The conclusions and recommendations of any Brookings publication are solely those of its author(s), and do not reflect the views of the Institution, its management, or its other scholars. 3 Executive Summary A total of 80 currency boards have come into existence at some point since the mid-19th century, but to date only about 15 of them still exist, among which is the CFA franc monetary zone. The future sustainability of the CFA franc zone, to which the CEMAC CFA franc belongs, is increasingly questioned in the light of increasing asymmetries in exposure to external shocks, differential speeds of adjustment of the real exchange rate follow- ing shocks, differential impacts in economic fundamentals, and low levels of intra-regional trade and financial flows between CEMAC and WAEMU. For the CEMAC bloc of countries in particular, the future sustainability of the fixed exchange regime depends crucially on continued oil exports, which currently represent about 90 percent of export revenues and 40 percent of GDP. Should oil reserves deplete in the near future or oil prices decline significantly, a substantial source of foreign reserves would be lost, thereby exposing the regime to collapse. Even without resource depletion, continued volatility in global financial markets is increasing the risks of collapse of the fixed exchange regime as oil and commodity price swings ignite currency speculation as well as render reserves much more volatile. Against this backdrop, the present study examines the stakes facing the CEMAC CFA franc, discusses the exit options from the currency board and makes recommendations towards a sustainable monetary policy framework for CEMAC countries going forward. The analysis points to the impera- tive of pursuing a full monetary union with a single CEMAC franc pegged to the U.S. dollar and further suggests that, like the experience of the eurozone, the CEMAC monetary arrangement can be best implemented only by complying with the principle of political union. 1. Introduction Since 1948, the African Financial Community (known by its French acronym, CFA) franc zone has existed as the monetary arrangement between France and two African regional bodies, CEMAC (Economic and Monetary Community of Central Africa) and WAEMU (Economic and Monetary Community of West Africa). CEMAC is comprised of six countries—Cameroon, Gabon, the Central African Republic, the Republic of Congo, Equa- torial Guinea and Chad—and WAEMU is comprised of eight countries—Benin, Burkina Faso, Côte d’Ivoire, Senegal, Togo, Mali, Niger and Guinea-Bissau. Comoros became the fifteenth member of the CFA franc zone in 1981, but has since maintained its own independent Comorian franc. The CFA franc currency board arrange- ment1 (CBA) thus links three currencies to the euro—the two CFA francs issued separately by the BEAC (Bank of the Central African States or Banque des États de l’Afrique Centrale), the central bank of CEMAC; the BCEAO (Central Bank of the West African States or Banque Centrale des États de l’Afrique de l’Ouest), the central bank of WAEMU; and the Comorian franc.2 By promising to convert all CFA franc notes issued by the CEMAC and WAEMU central banks into the euro at a fixed rate, the French treasury, through an operations account, guar- antees the peg of the CFA francs to the euro. In return for the “unlimited” lines of credit3 offered by the French treasury, two important institutional safeguards exist. First, at least 20 percent of sight liabilities of each central bank must be covered by foreign exchange reserves. Second, at least 50 percent of foreign exchange reserves of each member country must be held in the operations account and countries that draw on the overdraft facilities are subject to increasing interest rate penalties. 4 While CEMAC’s total population of 36.7 million people (in 2010) makes it roughly the same size as Poland, its combined GDP of $70.9 billion compares to that of Iraq. With the exception of Cameroon, each CEMAC country has a dominant export commodity accounting for over 80 percent of total export revenues. CEMAC countries, with the exception of the diamond-exporting Central African Republic, are net oil exporters, and their economic development is dominated by developments in the oil market. Although CEMAC’s trade with the eurozone economies continues to be important, over the last two decades CEMAC countries have been trading increasingly more with China and the U.S. As Figure 1 suggests, the share of CEMAC’s exports and imports to eurozone economies has declined from 0.64 percent and 0.57 percent, respectively, of world trade in 1990 to 0.26 percent and 0.41 percent of world trade in 2011. Interestingly, over the same period, the share of CEMAC’s exports to the U.S. and China, as a percentage of world trade, have grown by a factor of two and thirty, respectively. Figure 1: Trends in CEMAC’s External Trade AS % SHARE OF WORLD TRADE VALUE OF EXPORTS VALUE OF IMPORTS 1990 2011 1990 2011 CEMAC Average to China 0.005 0.15 0.008 0.12 CEMAC Average to the US 0.15 0.32 0.04 0.07 CEMAC Average to European Union 0.67 0.27 0.64 0.46 CEMAC Average to Eurozone 0.64 0.26 0.57 0.41 EXPORTS FROM CEMAC, IMPORTS INTO CEMAC, 1990- GROWTH IN AGGREGATE VALUE (%) 1990-2011 2011 CEMAC Average to China 12901% 11510% CEMAC Average to the US 680% 527% CEMAC Average to European Union 258% 245% CEMAC Average to Eurozone 250% 261% Source: Direction of Trade Statistics (DOTS). Data covers all CEMAC countries with the exception of the Central African Republic. The graphs presented in Figures 2-7 summarize overall economic activity and macroeconomic performance in CEMAC countries over the past decade. As Figure 2 reveals, the trend in CEMAC’s overall GDP growth has been largely consistent with the trend in its real non-oil GDP growth, although there is some similarity in co- movements of real oil GDP growth. It can also be observed that after declining from about 12 percent in 2007, CEMAC policymakers face two important challenges: one, breaking away from the current stagnating growth performance of non-oil GDP and, two, effectively utilizing oil GDP growth to leverage overall GDP growth. 5 real non-oil GDP growth has since stagnated at about 6 percent annually. It is also equally important to note that CEMAC’s non-oil GDP growth performance lags behind that of oil-exporting sub-Saharan Africa (SSA) economies as in Figure 3. At this point, CEMAC policymakers face two important challenges: one, breaking away from the current stagnating growth performance of non-oil GDP and, two, effectively utilizing oil GDP growth to leverage overall GDP growth. Figure 4 suggests that although real per capita GDP growth performance in CEMAC has been relatively superior to that in the WAEMU region during the past decade, CEMAC’s performance has lagged behind that of oil-exporting SSA and SSA economies without conventional exchange rate pegs. Figure 2: Trends in CEMAC’s Real GDP Growth Performance (%) 25 20 Real Non-oil GDP Growth 15 Real Oil GDP Growth 10 Real GDP Growth 5 0 -5 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -10 Sources: IMF, World Economic Outlook complimented by BEAC. Figure 3: Comparative Assessment of CEMAC’s Real Non-oil GDP Growth (%) 14 12 Oil-Exporting SSA 10 CEMAC 8 WAEMU 6 SSA without conventional 4 exchange rate pegs 2 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: IMF, April 2012 Regional Economic Outlook. 6 Figure 4: Comparative Assessment of CEMAC’s Real Per Capita GDP Growth (%) 12 10 Oil-Exporting SSA 8 CEMAC 6 WAEMU 4 SSA without conventional 2 exchange rate pegs 0 -2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: IMF, April 2012 Regional Economic Outlook. Figure 5 suggest that, although still markedly appreciated, CEMAC’s real effective exchange rate has been declining since 2009 and remains far below that of oil-exporting SSA economies. During the preceding decade, average consumer price inflation has been comparatively lower in CEMAC zone than in other oil-exporting SSA countries and SSA countries without conventional exchange rate pegs, as Figure 6 suggests. Also, in comparison with other oil-exporting SSA and SSA countries without conventional exchange rate pegs, CEMAC zone’s overall fiscal balance over the past decade has been more impressive, as suggested by Figure 7. Figures 8 and 9 suggest that CEMAC’s current account and reserve positions are broadly consistent with external stability, although CEMAC’s external position remains far less stable than that of other oil-exporting SSA economies.

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