by Simon Alison
(First published April 2015)
The CFA franc is the name of two currencies used in parts of West and Central African countries which are guaranteed by the French treasury. The two CFA franc currencies are the West African CFA franc and the Central African CFA franc. Although theoretically separate, the two CFA franc currencies are effectively interchangeable
In November 2011 three journalists with Côte d’Ivoire’s Notre Voie newspaper – César Etou, Didier Dépry and Boga Siviori – were arrested in the capital Abidjan and charged with “attempting to infringe the state economy”.
Their alleged crime? They had reported on a rumour – one prompting panic in Central and West Africa at the time – that France was about to devalue the CFA franc, the twin currency used by 14 countries in the region.
The consequences of such a move – soaring inflation, a liquidity crisis and a dramatic rise in the cost of imports – were well understood because it had happened before. In 1994 France devalued the CFA franc by 50%, a hugely unpopular decision that led to a sharp increase in the cost of living and widespread unrest, including riots in Dakar, Senegal’s capital, in which six policemen were lynched.
The 2011 rumour proved false. The three journalists were cleared. France did not devalue the currency. But the threat remains. The incident highlights an uncomfortable reality for 154 million citizens of Francophone Africa: five decades after independence, France still calls the economic shots.
When the colonial powers left Africa during the wave of independence in the 1950s and 1960s, they left plenty behind, including arbitrary borders, large communities of white settlers, and a pronounced bias, which persists in many countries, towards western languages and culture over local tongues and traditions.
This was not enough for the French. Anxious to arrest its declining power, and eager to formalise its ties with its former colonies, France left behind something more tangible in the shape of a currency: the CFA franc.
What this stands for has changed over time. Originally, it was Colonies françaises d’Afrique (French colonies of Africa), which implied French ownership. Now it is the Communauté Financière Africaine (African financial community) or the Coopération Financière en Afrique (financial cooperation in Africa) – more politically neutral phrases that mask the extent of French control.
The CFA franc was created in 1945, ostensibly as a noble gesture to protect France’s African colonies from a devaluation of the French franc. Under this carefully-considered control mechanism, participating countries were required to deposit most of their foreign currency reserves with the French Treasury, which in turn dictated monetary policy and mandated when and how governments could access the money. The currency was pegged to the French franc, with France alone able to determine the exchange rate.
The arrangement remains much the same 70 years later. Technically, two separate CFA francs are in circulation, each with its own central bank, in Central and West Africa.
Four fundamental principles guide France’s relationship with the CFA countries, Pierre Canac and Rogelio Garcia-Contreras explained in the Journal of Asian and African Studies in February 2011.
First, the French Treasury guarantees without limits the convertibility of the two CFA francs.“Second, the two CFA francs are convertible at a fixed exchange into French francs [now euros],” they wrote. That fixed exchange rate can change, but only with French approval.
“Third, despite plenty of restrictions, there are no de jure controls on the movements of capital within the [CFA] zone.” And fourth, the zone members must “pool together a minimum of 65% of their international reserves, corresponding to 20% of the monetary base of each central bank, into an operations account at the French Treasury”.
This last point is perhaps the most controversial: by depositing such a hefty chunk of their foreign reserves into a French-managed account, participating countries effectively lose control over their monetary policy. In addition, CFA members cannot use these funds as collateral to obtain credit because the reserves are held in the name of France. With French representatives on the boards of both CFA central banks, they are almost entirely dependent on French approval to set their own interest rates, or to control the amount of money within their economies – a basic policy tool for governments. They are reliant to a large degree on France to manage their currency and, through that, their economies.
So the crucial question is: does the CFA arrangement help or hurt the African countries involved?
Mamadou Koulibaly, an economics professor at Aix-Marseille University and a former speaker of the Ivorian National Assembly, does not mince his words: “The CFA franc is financially repressive, unfair, and morally indefensible,” he said in a 2008 interview in New African magazine.
“A currency… must adapt to the prevailing contexts,” he said. “To that effect, efforts must be made to enable countries to protect themselves against asymmetric shocks… as well as to be able to finance their development.”
The sharp increase in the cost of living incited by France’s unexpected 1994 devaluation exposed the vulnerability of CFA countries. The currency ossifies these countries’ economies and prevents them from pursuing policies that may be more successful at promoting inclusive growth, argues Sanou Mbaye, a Senegalese development consultant and a former senior official at the African Development Bank.
“The CFA franc arrangements keep the western African countries involved in the same economic shape as in colonial times,” he told Africa in Fact.
“They provide raw materials to France and import all their manufactured goods. The convertibility of the CFA franc and its free transferability, combined with high interest and exchange rates, keep the franc zone countries in a state of structural deficits that render any development policies irrelevant.”
Some may argue that the CFA zone offers low inflation and a stable exchange rate, which in theory should encourage trade and foreign investment, Canac told Africa in Fact. “Unfortunately, those benefits seem to be more illusory than real. The CFA francs are overvalued and thus hinder exports while making imports cheaper (benefitting the African elite)… Although this does not necessarily prove that membership in the CFA is responsible for holding those countries back, it suggests at best that it does not help.”
Supporters of the CFA franc arrangement contend that it safeguards the member countries against irresponsible governments that juggle interest rates or print money. With French backing and management, the CFA franc is unlikely to follow the Zimbabwean dollar whose value eroded after political turmoil and intense hyperinflation.
These advantages, however, may be more lopsided in France’s favour. “This dependence of the CFA countries ensures that France remains influential in this part of Africa,” Canac said. “The African countries are more likely to support France, allow it to maintain a military presence, and confer some prestige to France. For France the political gains are worth the small economic costs.”
These economic costs are the inconsequential amounts of cash that France injects into the CFA operations accounts when their balances run into a deficit, Canac added.
In addition to increased political influence, France reaps untold economic benefits, said Gary Busch, a political analyst who has written extensively on the subject. The CFA arrangement is “the biggest Ponzi scheme you’ve ever seen”, he said, referring to risky pyramid structures that depend on an ever-increasing pool of new investors to pay returns to prior investors.
Busch claims the operations accounts have never been properly reckoned. In addition, these reserves have been invested in the Paris Bourse with the French Treasury pocketing any profits. Busch also alleges that during the 2008-2009 financial crisis, the funds in the operations accounts were pledged against the huge loans made to failing euro zone countries, such as Greece and Italy. In other words, the foreign reserves of some of the world’s poorest countries were risked to protect European states from bankruptcy.
If this arrangement is not in the best interests of the African member states, why do they not leave and start their own currency?
Some have done so already: Algeria, Guinea, Morocco and Tunisia exited the CFA zone shortly after independence. What is to stop other countries from following suit today? This arrangement’s longevity may lie in the grander scheme of La Francafrique, the catch-all term for the cosy, often corrupt relationship between France’s leaders and its former African colonies. France is the major guarantor of the African political elites’ power, as demonstrated by its frequent military interventions on the continent. French leaders, meanwhile, solicit campaign contributions from their African counterparts and rely on their influence to promote French interests in the region.
Without limits on the currency’s convertibility, crooked leaders can transfer boundless amounts of money out of the country. “I think the CFA countries have stuck with this arrangement because the elites… are not really interested in the development of their countries, and are more concerned in maintaining political control and keeping their wealth, acquired largely through corrupt practices, in euros, probably in a French or… Swiss bank,” Canac said.
Moreover, France blocks any moves towards economic independence, Koulibaly added. “The CFA proponents pretend not to see the political and financial repression which successive French presidents have exercised over their African counterparts who have tried to leave the CFA zone system,” he claimed.
“Added to this is the nature of the African elites and the political class who, during this long period, have continued to pretend that they don’t have the necessary expertise to manage their own currency in a responsible and efficient manner.”
The French Treasury declined to comment or provide information for this story, as anticipated. It is notoriously unwilling to comment on the CFA franc or to defend it. According to Lionel Zinsou, a French economist and investment banker, this “habit of silence” from all institutions connected with the CFA franc (including the two central banks) contributes to negative perceptions of the currency.
Zinsou, a former economic adviser to both the president of Benin and Laurent Fabius, France’s foreign minister, is one of the few vocal supporters of the currency. In a telephone interview with Africa in Fact, Zinsou explained that management of the currency had changed dramatically since its inception: these days African officials were the ultimate decision-makers when it came to major changes in monetary policy.
Zinsou maintains that the currency’s economic benefits outweigh its drawbacks. He cites: the low interest rates in CFA zone countries, which have historically hovered between 1% and 5%, compared to double that in neighbours such as Ghana and Nigeria; the stable peg to the euro, which eases trade with the euro zone, overwhelmingly the largest trading partner for all CFA countries; and, most importantly, regional integration, which is further advanced in the CFA zone than anywhere else in Africa.
“What [Africa] misses the most is a significant regional market with converging policies and free trade, and de facto the CFA zones are very much areas of building regional integration,” Zinsou said. “The currency for the time being is by far the most powerful instrument of convergence. So even if there was no link to the French territory… it would be probably very advisable to remain together and manage together the currency.”
Zinsou has a point. Regardless of the benefits it may or may not offer to citizens, the CFA franc suits member states’ leaders and will not disappear anytime soon. But perhaps this arrangement offers a golden opportunity. The African Union is pushing its various regions to introduce single currencies, and eventually a common coinage for the entire continent. While currently dysfunctional, the CFA franc zones are already halfway towards achieving this goal.
If they could wrest control of this currency back from France (while maintaining its integrity) and stimulate significant cross-border trade, these countries could find themselves at the forefront of Africa’s economic development, instead of languishing in a colonial hangover.