The recent fall of the CFA franc against the dollar poses threats of inflation but also opens up export possibilities for the 14 African countries that use the currency.
Due to its fixed parity with the euro, the CFA franc has followed the European currency’s downward trajectory against the dollar in recent months. The euro fell below parity with the dollar for the first time in 20 years on 13 July, trading at one point at €0.9998 to the dollar, a fall of 12% since January.
The CFA franc fell correspondingly. Although the currencies have rallied slightly since then, it currently takes CFA642 to buy a dollar, in contrast with CFA580 at the end of December and CFA557 a year ago.
The fall of the euro and other currencies against the dollar has been attributed to interest rate hikes by the US Federal Reserve along with the uncertain economic situation following Russia’s invasion of Ukraine, which has led investors flock to the greenback as a safe haven.
The naira, cedi and Kenyan shilling have all fallen to record lows against the dollar in recent months, but the Nigerian, Ghanaian and Kenyan governments have more room to make fiscal adjustments than those of the African franc zone (see below).
Negative effects will outweigh the positive, says Songwe
The CFA franc’s fall in value will have a negative effect on the cost of imports into the African franc zone. This will be a case of “imported inflation”, UNECA executive secretary Vera Songwe told Jeune Afrique (in French).
“The rise of around CFA100 to buy a dollar might not look much, but the losses are enormous when you are talking about a container full of merchandise,” Joelle Dombou, a trader who imports material into Cameroon, told the BBC’s French African service.
The currency depreciation could help the African franc zone’s exporters of raw materials – for example, Côte d’Ivoire will get more for its exports of cocoa and Gabon more for its oil – but the overall impact will still be negative, according to Songwe.
These countries will pay more for the refined products they import, and the small gains from exports will be cancelled out by the increased cost of paying debts denominated in dollars.
Which countries use the CFA franc?
Created in 1945 for use in France’s African colonies, the CFA franc remains the currency of 14 independent African countries – the eight members of the West African Economic and Monetary Union (Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau , Mali, Niger, Senegal and Togo) and the six members of the Central African Economic and Monetary Community (Cameroon, the Central African Republic, Chad, Equatorial Guinea, Gabon and the Republic of Congo).
Because of the fixed parity with the euro and the fiscal arrangements to ensure its convertibility can be guaranteed by the French Treasury, these countries have no power to effect their own adjustments when the European currency loses value.
Defenders of the CFA franc point to the macroeconomic stability and low inflation that it has brought to these countries over the long run.
The currency’s detractors see it as a form of neo-colonial tutelage. France’s role as guarantor of the CFA franc has given it great power over its former colonies, whose monetary policies have had to remain in step with those of France, and latterly the European Monetary Union.
The CFA franc has been described by authors Fanny Pigeaud and Ndongo Samba Sylla as “Africa’s last colonial currency” and opposition to the currency has formed one strand of the anti-French populism that has been growing stronger in the region.
When will the West African single currency see the light of day?
The fact the announcement was made by Macron and the president of one the West African countries most closely associated with France was seized on by critics, as was the way it seemingly attempted to hijack the creation a single currency for all of West Africa’s countries.
Major reforms to the currency, including an end to the requirement that half of its reserves be kept in France, were announced in December 2019 by President Emmanuel Macron of France and President Alassane Ouattara of Côte d’Ivoire, but have not satisfied the currency’s harsher critics.
For decades there have been plans to merge the West African CFA franc with the currencies of Ecowas members not in the West African Economic and Monetary Union (Cabo Verde, Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone) to create a single West African currency.
Macron and Ouattra’s plan involved adopting the proposed name of the new currency – the eco – for the reformed West African CFA franc and then inviting the non-CFA West African countries to join it, ignoring the process of planning and negotiation that had been going on in the region.
However, little to no progress has been made towards the single currency in the last two and a half years, and with no date set for its launch there are concerns that the project may be drifting, says Lamin Manjang, cluster CEO, West Africa, and CEO of Standard Chartered Bank Nigeria Limited in an opinion piece for African Business.