Articles What Makes the CFA Zone a Special Form of Monetary Integration ?

Souleymane NDAO* to the overall stability of their competitive positions. Given that the was issued Summary: by supranational central banks and that France experienced a relatively high stability The CFA franc zone is the most notable of the price level throughout the 1980s, the example today of a regime change in which countries of the CFA franc zone managed sovereign countries are united not only to use to achieve discipline and credibility in the the same currency unit, but also to add value implementation of their macroeconomic to that of another monetary unit in a fixed policies. relationship. In some important respects, this In addition, the external guarantee zone differs from other monetary unions, mechanism credits, in the form of overdrafts including emerging unification of the European to operations accounts with France, helped , so the traditional criteria applied mitigate some of the effects of the deterioration to identify the optimal monetary zones are of the positions of net foreign assets. Therefore, not sufficient to assess its performance. if the collective well-being depends primarily on It is indeed difficult by using only traditional price stability and growth, belonging to the area criteria to argue that the African franc zone is a has obviously been beneficial to those countries. natural monetary area: the intraregional trade However, the collective well-being also depends is quite limited, the structure of production on the balance of the external accounts, and varies across the different countries due to if the nominal exchange rate can be modified the massive shocks produced by the terms to cushion the adverse shocks caused by of trade in the past two decades, which had a the terms of trade without undermining the different impact on the countries of the region authorities credibility and financial stability, the and factors mobility does not seem to be net benefits of membership in the area are less sufficient to make up for these differences. obvious. The arguments in favour of specific Key words: CFA franc zone, African provisions to transform the CFA franc zone monetary cooperation, France. is based on two grounds, the area combines JEL Classification: F45 F55 O11 the features of a monetary union and those of a zone with fixed exchange rates. Due to the 1. Introduction fact that all African countries participating in the area have a very well developed he CFA franc zone consists of a group trade with France and with other European Tof countries of Central Africa and West countries, pegging their currencies to the Africa whose currency was be pegged to the , now in euro, has contributed French franc at a fixed parity in 1948, and to

* CRIISEA, Université de Picardie Jules Verne, Amiens, France ; [email protected]

491 What Makes the CFA Franc Zone a Articles Special Form of Monetary Integration? the euro since 2002. Today this is the most Section IV summarizes the main conclusions. notable example of an exchange system in 2. Evolution of the franc CFA zone which sovereign countries are united not only to use the same monetary unit, but also to The CFA franc zone has its roots in the attach value to that of another monetary unit French administration colonies before and in a fixed relationship. immediately after the Second World War. The area differs in important respects In fact in the 1930s, France took action to from other monetary unions, including the establish monetary units in each colony, and unification of European currencies and the link them to the French franc. In 1945 at the traditional criteria that identify the optimal end of the war, many of these monetary units monetary areas. Most studies carried out were unified to become either ‘the free French to determine the efficiency in the area have colonies of Africa’ or CFA or CFP French generally focused on the viability of the fixed colonies of the Pacific. The Central Fund exchange rates. Those that emphasize the for French Overseas Territories (CCFOM) importance of low inflation are in a favorable created during the war to replace the french position. Those that attach more importance banknotes issued during the occupation was to international competitiveness are critical. set up to ensure franc CFA emission. Yet, the problem has another dimension. The principles governing the wider franc Indeed, if the monetary area is not optimal, area included a) the convertibility into French Franc CFA Countries members

needs may vary from one member country at fixed parity, b) the guarantee of to another. This paper aims to make an convertibility by French Treasury through objective assessment these two aspects. the „operations accounts» for the two Why Franc CFA area is different to the African central banks, c) the free movement other monetary zones of capital in all the area, d) the deposit of This paper attempts to make an overview 50% of foreign currency reserves to the of the relevant features of the member states French Treasury and e) the elaboration in the area and to describe the nature of its of a trade policy and a common financial institutions (Section II). It then moves on to policy vis-à-vis the rest of the world. These analyze the various economic factors that different principles comprise the specific can help determine viability (Section III). mode of governance of the area.

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Initially, the CFA franc zone covered a late 1967, the parity of the Malian franc significantly larger geographical area than was equal to that of the CFA franc, but the its current area, and its origins are largely currency was not convertible. From 1967 political, not economic in nature. to late 1984, the parity was maintained However, from the mid-1970s the area independently vis-a-vis the French franc (at comprised more than a limited set of 100 Malian francs for 1 French franc) and countries due to the withdrawal of several convertibility was guaranteed through an Member States, mostly scattered in other account of separate operations open in the parts of Africa. books of the French Treasury. The official Thus the Saint Pierre and Miquelon absence of the Mali franc zone during the islands off the coast of Newfoundland in the second period has therefore been the main North Atlantic were part of the CFA franc practical consequence allowing a country to zone until January 1973, the date on which manage its own Central Bank and prevent they adopted the French franc. Another the exchange rate of its currency (as legal overseas department, the Reunion Island, tender) fluctuate. adopted the French franc in 1975. The It can therefore be argued that the CFA Comoros created their own currency in 1981 franc zone has evolved into a group of (the ), which is still to be countries, whose ties are looser than before pegged to the French franc. and are more of a political nature. These territories, as well as other After an initial period characterized by a territories of the franc zone, could have certain instability, in October 1948 the CFA been included in the analysis hereinafter. franc’s exchange rate was fixed at 0.5 CFA The main goal of their omission is to focus franc for French franc. This rate has not the analysis on a relatively homogeneous changed since 1994. The CFA has always group of countries. been freely convertible in Frenc francs (now Other countries also pulled out of the in euros) with an established parity, and the area - Djibouti in 1949, Guinea in 1958, Mali degree of mobility of capital vis-a-vis the rest in 1962 until the renewal of its accession in of the world has been determined primarily 1984, Madagascar in 1963 and Mauritania in by the evolution of capital control in France. 1973 - ans adopted independent currencies. The CFA franc zone’s original institutional In 1985, Equatorial Guinea became the structure was no longer appropriate first country in the region that had not had when the Member States gained their colonial ties with France (and the first non- independence at the end of the 1950s and French speaking country). in the early 1960s. For a detailed account of the history of The area comprises both, the eight (8) the franc zone, see the work of Yansane members of the west African monetary (1984) and the following references, Bloch- Union (WAMU) that have a common Laine et al. (1956), Neurrisse (1987), St. central bank - the Central Bank of West Mark (1964) and Vizy (1989). Giulia (1988) Africa States (BCEAO), and a common - analyzes the 1955-1975 period. The monetary currency - the Franc of the institutional structure that was in place prior African Financial Community. The area to the major 1974 reform is described in also includes the other six (6) African the studies of FKI (1963, 1969). Regarding countries, whose common central bank is the emergence of the area›s modern the Bank of Central African States (BEAC) economic structure, see Bhatia (1985) and and common currency unit - the franc of McLenaghan et al. (1982). From 1962 to Financial Cooperation in Central Africa.

493 What Makes the CFA Franc Zone a Articles Special Form of Monetary Integration?

In the central area of ​​Africa (BEAC), These accounts were remunerated the common central bank issues an in French francs previously, now in Euro. identifiable monetary unit for each France guarantees the convertibility in part Member State, though the respective by allowing Central Banks to have access to monetary units are legal tender and have its overdraft facilities. Maintaining monetary such power throughout the region. In discipline is ensured by a) the levying of the Western Region of Africa (BCEAO), interest on overdrafts, b) the application of a single currency unit is circulated. rules under which regional central banks Both currencies are defined as regional should limit credit when balances fall monetary and are designated by the term below a fixed level, and c) a ceiling to the CFA franc, but they were legal tender contribution they can make to each state, in their own area. That is, the monetary which is equal to 20% of budgetary revenues unit issued by the BCEAO has no legal for the preceding year. power in the member countries of the The organization of the CFA franc BEAC and vice versa. The statutes of the zone - which combines the features two central banks allow them in principle of a monetary union among sovereign to change the parity vis-a-vis the French countries, linking coins and currency of a franc independently from one another (for cooperating country outside the region, is further details see Vizy 1989). virtually unique. Examples of systems that Nevertheless, given that the parity resemble the CFA franc zone include the of the two monetary units has remained group of countries that are not parties to unchanged for over 40 years and that, the monetary arrangements of the Central under parallel agreements with France, Bank of the Eastern Caribbean, the the convertibility of the two monetary Common Monetary Area, which includes units into French francs is guaranteed, Lesotho, South Africa and Swaziland the CFA franc zone can be regarded and Belgo-Luxembourg economic Union. in almost all its aspects as if it were a In each case, however, the structure is single monetary unit. substantially more flexible than that of the Each region is dominated by a relatively franc zone. large country that represents roughly 25% The Eastern Caribbean dollar - the of production in the region: the Ivory Coast monetary unit of Anguilla, Antigua and in West Africa and Cameroon in Central Barbuda, Dominica, Grenada, Montserrat, Africa (see table 1). Out of the 13 countries, Saint Kittset Nevis, Saint Lucia and Saint nine rank among the low-income states, the Vincent and Grenadine - is pegged to the three fuel exporters (Cameroon, Congo and US dollar. Unlike France in the case of the Gabon) have a relatively high per capita CFA franc zone, however, the United States GDP, while the Cote d’lvoire occupies an is not party to this agreement. intermediate position. The monetary units Lesotho and Relations between the countries of the Swaziland are each attached to the South CFA franc zone and France are an integral African rand; although the rand is legal part of the system. Each regional Central tender in Lesotho, the three currencies are Bank has an account with the French different in all other respects. In principle, the Treasury called account of operations, in parity of the two monetary units of the two which it is obliged to hold its foreign exchange smaller countries - Lesotho and Swaziland reserves (other than cash necessary for its - could be modified without the consent of current account). the other party (the largest country).

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Table 1. GDP per capita in USD 1970 1980 1990 2000 2010 2014 WAEMU Benin 114 377 391 339 690 825 Burkina Faso 81 282 351 226 574 713 Ivory coast 227 1231 887 648 1236 1545 Bissau-Guinea 110 130 230 281 518 567 Mali 60 252 285 219 621 706 Niger 144 420 313 160 351 427 Sénégal 242 629 760 474 998 1061 Togo 120 417 430 265 496 635 CEMAC R public of central é 103 350 490 245 446 371 africa Cameroun 171 754 923 583 1147 1429 Congo 205 946 1172 1035 2953 3137 Gabon 548 5869 6250 4115 9388 10208 Equatorial Guinea 228 229 297 1970 15869 17430 Chad 128 228 291 166 895 1024 Sub-Saharan Africa 217 700 589 541 1525 177 3 Source: World Development Indicators (World Bank). The stability of monetary exchange to the African Member States. The rate of the CFA franc zone to the French conclusion arrived from the overview franc, which has remained intact since is that, it is essential to regard the CFA 1948, and in 1994, is quite extraordinary franc zone as part of a larger monetary for a such diverse group of developing area comprising France, and its role as a countries. There is no doubt that it plays a support system also falls within the scope decisive role in the economic performance of our review. of the region. 3.1. The area as an monetary union 3. Economic Issues According to the article of Robert Mundell We can readily assume that, according (1961), who established a school of though to the most traditionally used criteria, on the matter, the criterion that characterizes the CFA franc zone in itself would not a natural monetary union is that participating constitute an optimal monetary or natural countries should feel the same effects of the area. That conclusion is valid that we are disturbances (and therefore cannot expect relatively up to a narrow point of view such variations in relative prices). Furthermore, as that of the economist Robert Mundell, there should be a high degree of factor or is available departing from a longer list mobility from one country to the other of relevant factors. What is perhaps less (countries therefore being able to adapt to the obvious is that only these considerations asymmetrical disturbances without having to do not allow to evaluate the CFA franc change the structure of relative prices1). Yet zone, because the system is not limited there is a number of other criteria that have

1 Eichengreen (1990), for example, applies these criteria to European countries and concludes that Europe remains furthest from 1‘ideal optimal monetary area that monetary unions of America

495 What Makes the CFA Franc Zone a Articles Special Form of Monetary Integration?

Fig. 1. Annual inflation rate (%) been suggested at different points in time. It economy. In practice, it goes without is generally assumed that there is no official saying, that price flexibility is still limited, or standard parameter to assess the sound especially when it is necessary to reduce foundation or the effectiveness of a particular the price in absolute terms. monetary union. The tools that governments have the To Mundell’s criteria, one might add (at the discretion to use in order to reduce wages very least) the following ones: a) flexibility at in the public sector or producer prices reasonable prices and wages (Marston, 1981); face a contraction in export earnings, b) similarity of preferences in matters of inflation once the option of a devaluation is ruled (Fleming, 1971; Haberler, 1970 Canzoneri and out, the main question raises in matters Rogers, 1990); c) high level of intra-regional of flexibility in the CFA franc zone. There trade (McKinnon, 1963 and 1979). have been some notable examples of reductions like this, especially after 3.1.1. Flexibility of wages and prices the fall in world prices of many export Establishing a monetary union would commodities in the mid and late 1980s. normally depend on the limited flexibility In addition, salaries in the private sector of wages and prices. Given that the have shown reasonable flexibility. Levy exchange rate is fixed, the flexibility of and Newman (1989) provide detailed data other prices (other than currency) help that are based on generalized reductions each country adapt independently to any in real wages in Ivory Coast between 1979 disruption that could possibly affect it or and 1984, a period during which inflation its partners. grew at a cumulative rate of 48%. Overall In an extreme scenario, if all prices wages increased by 74% in nominal terms were fully flexible (without including and by 18% in real terms during this costs), the exchange rate could be fixed period. Yet the microeconomic data show affecting the collective well-being, and that real wages would have decreased by optimal monetary zone would be the world 8 % if there had been no change in the composition of structure of jobs.

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Nevertheless, domestic prices have If labor mobility should contribute to not shown a general tendency to respond the functioning of a monetary union, it flexibly the changing environment. In any is essential that migration takes place. case, there has been a strong resistance Yet migration should further respond to to reductions in wages and prices, the changes in relative real wages and whether in developing countries, and other emerging differences in economic these reductions are not the fast track to development. However, the factors a balance. pertaining to religious or tribal order African countries in the franc zone probably have a strong impact on labor have all recorded low inflation rates, flows. Many regulations were introduced but the financial systems of just a few after the national independence of many countries were pressured by maintaining countries, that is at the end of 1950s, uniformly low rates. to reduce the importance number of On average, the economic performances foreigners during the colonial period. in real terms were at least as good, or Nevertheless, at present, the economic better than those of neighboring countries conditions appear to be the main reason that had integrated an active exchange of international migration in the region. rate policy within their overall adjustment strategy, although some significant In addition, the geographical structure differences across countries have been of migration seems to evolve gradually observed. and many migrants can stay briefly in a country. 3.1.2. Mobility of factors 3.1.3. Similarity of disruption after shocks Considering that wage and price flexibility is limited, it is important that To the extent that the member there is a reasonable degree of factor countries of a monetary union are mobility between countries. In particular, not even concerning their flexibly to the unemployed should be able to external shocks, it is important that they travel freely to countries where jobs are shall protect some degree of shocks to relatively abundant. On this point, the particular countries. results so far are also quite inconclusive. If, for example, the composition of Labour mobility labor in the region commercial exchanges by product is seems to be limited by the large distances the same for each country, disturbances that separate the agglomerations and the are likely to have similar effects on all shortage of transportation means. countries. Similarly, if the foreign trade of Historically, however, there has the country consists of different products, been great labor migration between the but it is done with the same countries countries of West Africa. For example, outside the region, it is still quite likely that over the past 20 years, 25% of employed any monetary area will feel the same way in Ivory Coast were not Ivorian nationals. the repercussions of at least certain type About half of these were nationals of of disturbances. In an important case and Burkina Faso, and almost a quarter - in the context of a monetary union, a high nationals of Mali. The immigrants coming level of intra-regional trade - as in the from these two countries, and Gambia European Community - can significantly and Guinea, also represented a high contribute to regional stability. share in the labor force of Senegal.

497 What Makes the CFA Franc Zone a Articles Special Form of Monetary Integration?

Table 2. Fall in exports of agricultural products Secondly, networks of transport and (1985 – 1990) communications in the region are insufficient, Pays especially if we take into account the great Bénin -57% distances. Burkina -13% Thirdly, the domestic producers in a Côte-d’Ivoire -32% number of countries enjoy a protection Mali 7% element. In most cases, imports from Niger -38% countries belonging to the same region Sénégal -20% (West Africa or Central Africa) are not Togo -14% subject to restrictions. Sources : BCEAO report 1990. Fourthly, a volume of unregistered but Intraregional trade comprises a probably significant intraregional trade is relatively small share of the total trade of part of the informal sector and is therefore the countries in the CFA franc zone, and not taken into consideration in this paper. it is certainly negligible compared to intra- Besides the benefits that can derive European trade, for example. Consequently, from their participation in a monetary union, the positive effect that the use of a common countries in the CFA franc zone can benefit currency has on transaction costs would be from linking a reference unit, the euro, lower in the CFA franc zone than in Europe. because of their integration has extensive The declared trade between countries European monetary area. These benefits may of the CFA franc zone comprises about include economic stability from the Credibility 14% of total trade for the member states of the measures taken by the government or taken together. This figure is at odds with the discipline of the implementation of these the 55% share that intraregional trade had measures; guaranteeing the convertibility of during the same period for the countries their currency unit; and support, including participating in the exchange mechanism of economic, France or other countries. But the European Monetary System. Moreover, the benefits should be reports to the costs probably the importance of intraregional imposed by the abandonment of monetary trade is somewhat overstated, because policy as an instrument of independent trade in warehouse has not been fully economic policy in the long term and the taken into account: indeed, the relatively possibility of an overvaluation of the real high estimates with regard to the enclaves exchange rate. countries, including Mali, Burkina Faso The arbitrage which operates will be and Chad, are due to a large quantities of more beneficial to the countries of the CFA exports respectively to Senegal, while the franc zone insofar as their external trade is Ivory Coast and Cameroon are re-export with Europe because a similar geographical destinations. distribution of foreign trade plays the same The limited share of intraregional trade role as the high level of intraregional trade. is explained in several ways. 4. Conclusion Firstly, given that incomes are very low throughout the region, the domestic We cannot give a simple and market for exchangeable goods produced straightforward answer to the question by these countries is not developed. A whether the CFA franc area is a set of fortiori, the potential for specialization of effective arrangements for the effiecient production in the region is limited. pursuit of economic policy of member countries.

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Based on traditional criteria, it is and economic growth, the participation difficult to argue that the African countries- in the zone provides gains and benefits. members of the franc zone are a natural However, if collective well-being also monetary area: intraregional trade is depends on the external balance and significantly limited, the structure of if the nominal exchange rate can be production shows considerable differences modified to cushion the persistent shocks across countries, the massive shocks caused by an unfavorable change in the generated by the terms of trade over the terms of trade without undermining the last two decades influenced the countries credibility of the authorities’ commitment in the region. In all countries, the inflation to financial stability, then the answer is rate remains low, at least compared to Sub- not as clear and straightforward. Saharan Africa, though the maintenance of uniformly low rate puts pressure on some References countries’ financial systems. In real terms, the region’s economic performance has Bloch-Lainé, F. (1956). Etudes sur les generally been as good as, or better than, zones monétaires, Revue économique, those of neighboring countries that have n°6, 1953. – La zone franc, PUF, Paris pursued active exchange rate policies as 1956. an integral part of their strategy of global ajustment. Devarajan, S and J, de Melo (1990). In its relationship with the CFA franc Membership in the CFA Zone: Odyssean zone, France has had a more distinct role Journey or Trojan Horse? Banque and anchor function covers a more formal mondiale, Policy. Research, and External character. Affairs Working Paper WPS 482. Given that the monetary unit is issued Devarajan, S. et Dani, R. (1991). Do by supranational Central Banks and that the Benefits of Fixed Exchange Rates France experienced a relatively high Outweigh Their Costs? The Franc Zone price stability in the 1980s, the countries in Africa, National Bureau of Economic of the CFA franc zone could develop Research, document de travail n° 3727. their macroeconomic policies in a disciplined and credible way. Indeed, they Guillaumont, P. (1993). L’intégration have registered a low inflation without économique: un nouvel enjeu pour sacrificing the growth of their production. la zone franc, Revue d’économie du In addition, access to the external développement, n°2. credits in the form of overdrafts Hugon, P. (1990). Zone monétaire et at operations accounts with the French intégration régionale: le cas de la Treasury helped to mitigate in part the zone franc, Techniques financiéres et effects of the deterioration of net positions développement, n°21. of foreign assets. Finally, the answer to the above Lelart, M. (1989) L’avenir de la zone question also depends on the nature of franc dans perspective de la construction both the function of collective welfare and européenne, Revue d’économie the transmission process of economic financiére, n°8-9. policy issues, which fall beyond the scope of this paper. If collective well-being Mundell, R. (1972). African trade, politics is primarily a function of price stability and money, in Tremblay ® (ed.).

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