A Look At the CFA Franc – The Controversial Currency at the Center of the French – West Africa Feud

The CFA Franc was introduced on December 26 1945 to improve stability among French colonies after World War II.

France established the CFA Franc to replace the French West African Franc used in its colonies, and according to analysts, the unified currency has served as a tool for France to continue maintaining influence over the economy and administration of countries in the zone.


Initially pegged to the French Franc at a fixed rate, colonies were protected from the effects of an underperforming French currency, making imports from France cheaper but adversely affecting their global competitive advantage.

In the 1950s, the CFA Franc became fully established as the common currency for French-speaking African colonies, maintaining a fixed exchange rate with the French Franc. During the 1960s, despite gaining independence, most of these countries retained the CFA Franc as their currency under new agreements with France. The CFA Franc then split into two separate currencies:

• The West African CFA Franc (used by countries in West Africa) and
• The Central African CFA franc (used by countries in Central Africa), each with its central bank

With the introduction of the Euro in 1999, the CFA Franc was pegged to the Euro, continuing the fixed exchange rate system.

CFA Franc Zone

The CFA Franc zone encompasses 14 countries in Sub-Saharan Africa, each aligned with one of the two monetary regulatory unions:

• The West African Economic and Monetary Union (WAEMU, or, by its French acronym, UEMOA) and
• The Central African Economic and Monetary Community (CAEMC, or CEMAC)

The WAEMU comprises Benin, Burkina Faso, Cote d’Ivoire (Ivory Coast), Guinea-Bissau, Mali, Niger, Senegal, and Togo, while the CAEMC comprises Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon.

The CFA Franc zone imposes its own set of limitations on economic independence:

• Individual countries within the zone are unable to devalue their currencies to make exports more attractive, hindering economic growth
• A unified monetary policy under the CFA zone doesn’t allow the countries to adequately respond to their unique challenges
• Policies targeted at export promotion may be challenging to execute if they are inconsistent with the zone’s overarching objectives
• Appreciation of the Euro makes exports more expensive, effectively destroying competitiveness in the market

The last point creates a domino effect, making the economies reliant on certain commodities and ultimately leading to poor productivity in other sectors.

The requirement that members cannot devalue their own currencies was initially set at 100% of foreign exchange reserves, meaning that African countries had to deposit all their foreign exchange reserves with the French Treasury.

While the requirement was reduced to 65% in 1973 and then to 50% in 2005, it remains the most controversial feature of the CFA Franc. According to analysts, member states holding a significant portion of their foreign exchange reserves in a common pool managed by the French Treasury restricts their ability to devalue their currencies, which could have made exports more competitive.

Reforms

In 2019, an initiative dubbed Macron-Ouattara initiative was introduced to modernize the West African CFA Franc and reduce French influence.

Named after the Presidents of France and Cote d’Ivoire, Emmanuel Macron and Alassane Ouattara, the initiative involved three main reforms:

• Renaming the currency to the ‘Eco’
• Abolishing the requirement for WAEMU countries to deposit their reserves in the French Treasury
• Withdrawing French representatives from the boards of the Central Bank of the WAEMU, known by its French acronym BCEAO (Banque Centrale des États de l’Afrique de l’Ouest)

The implementation of the initative has however been delayed due to several reasons, including the Covid-19 pandemic and varying economic conditions among member states.

Still, transition efforts to the Eco are ongoing, with negotiations said to be at an advanced stage. But even in this process, France faces accusations that it is undermining reform attempts by the African governments.