By Aryan Shah
During the 20th Century it amassed 10% of the world’s land mass and stood as the second largest empire on the globe. But as a wave of independence was to hit the French’s colonies in West Africa after the Second World War, the only way for the Empire to continue their reign was not through Imperialism, but Economics.
What is the CFA Franc?
The CFA Franc is a colonial currency currently used in 14 African Countries. The ‘CFA’ originally stood for the Colonies Françaises d’Afrique (the French Colonies of Africa). There is the West African Franc used in 8 West African Countries (Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo) and the Central African Franc used in 6 Central African Countries (Cameroon, the Central African Republic, Chad, the Republic of the Congo, Equatorial Guinea, and Gabon). Both have a Central Bank, that of the UEMOA (West African Economic and Monetary Union) in Dakar, Senegal where CFA stands for the Financial Community of Africa whilst that of the CEMAC (Economic and Monetary Community of Central Africa) is in Yaounde, Cameroon where CFA stands for the Financial Cooperation in Central Africa. Whilst they have apparent differences, they are small (and so will be referred to as one currency in the remainder of the article) and at parity and thus interchangeable, with 655.957 CFA Francs = 1 Euro.
The Origin of the CFA Franc
It was officially created on 26 December 1945 by a decree of General de Gaulle, which was at the same time France ratified the Bretton Woods Agreement. This agreement devalued the French Franc in order to set a fixed exchange rate with the US Dollar. The official reason for the creation of this new currency was to spare the strong devaluation to its colonies, an arguable humanitarian effort from the French. But more clearly it can be seen as the implementation of a colonial currency born to control the region’s resources, economies and political structures.
In 1948 one CFA Franc gave you two French Francs. But when the new French Franc replaced the old in 1960, the new French Franc dominated and 50 CFA Francs now exchanged to just one French Franc. Between the 1950s and early 80s the Franc Zone countries outperformed the other sub-Saharan countries with higher growth and lower inflation.
But in the 1980s and early 90s the Franc Zone economies began to stagnate. Côte d’Ivoire averaged an annual GDP growth rate of 9.5% between 1960 and 1978 but in 1980 saw a negative 11% growth rate. This followed suit in many of the Franc Zone countries. Between 1986 and 1993 the CFA became significantly overvalued and subject to increasing deficits in the French Treasury’s operations accounts. Domestic production fell drastically and the Franc Zone countries increasingly relied on imported materials. CFA countries’ public debt increased leading to significant fiscal imbalances.
As a result, in 1994, Franc devalued the CFA Franc where 100 CFA Francs exchanged for one French Franc, up from just 50 CFA Francs. Whilst the overnight change led to the expansion of the agricultural, logging and textile industries, rising inflation was seen in all member states. Since those who made the decision did not live in the impacted countries, they did not have to deal with the widespread unrest over inaccessible consumer goods and unmanageable price controls for suppliers.
The Terms of the CFA Franc
The CFA Franc has several terms and are where several debates over its continued use originate. One of these is there being a fixed rate of exchange with the Euro (and previously the French Franc). Another is that since 2005, the Central Bank of West African States and the Bank of Central African States have been required to deposit 50 percent of their foreign exchange reserves in the French Treasury. Immediately after independence, this stood at 100 percent and then 65 percent between 1973 and 2005. In addition another 20% must also be kept in the French Treasury for ‘financial liabilities’. Thus, member states only retain 30 percent of reserves within their borders. In return, France guarantees the unlimited convertibility of CFA Francs into euros and pays out a 0.75% interest on the deposits to the Franc member states. However, CFA Franc members cannot withdraw more than 20% of their deposits within one year, if they would like to withdraw more they would have to pay France a fee just to borrow their own money.
Better In or Out?
There are several critics of this colonial currency both within France and the CFA zone countries and they base their judgement and analysis on several different arguments. Firstly, they condemn the absence of monetary sovereignty. France holds a de facto veto on the boards of the two central banks within the CFA Franc zone. Since the reform of the Central Bank of West African States in 2010, the conduct of monetary policy was assigned to a monetary policy committee where the French representative is a voting member whilst the president of the West African Economic and Monetary only attends in an advisory capacity. Critics go further to argue that since the CFA Franc has a fixed exchange rate to the Euro, the monetary and exchange rate policies of the CFA zone nations are also dictated by the European Central Bank, which entails an anti-inflation bias detrimental to growth. Secondly, they note that the coupling of the CFA Franc to the euro is detrimental to growth within the CFA zone. Since countries can use their currency rates to influence their economy (for example, by devaluing their currency to produce cheaper goods and thus boost exports), they can use their currency rates to influence growth. But CFA Franc countries aren’t able to independently set their exchange rate and by being pegged to the Euro, their prices are automatically higher. This not only reduces their competitiveness but it also favours imports from countries with weak currencies, like China. These critics therefore argue that not only does it limit growth as they are less competitive, they are also importing finished products which limits the industrialisation of CFA zone members and makes them more dependent than they already are on exporting raw commodities.
Thirdly, critics of the colonial currency note that membership of the franc zone is synonymous with poverty and under-employment. This is seen by the fact that 11 of its 14 members are classed as Least Developed Countries (LDCs), while the remainder have all experienced real-term economic decline. They also maintain the fact that the CFA zone contains 13 percent of the continent’s population but accounts for just 8 percent of its output.
Finally, they argue that membership of the Franc zone inhibits the advance of democracy. France maintains a considerable military presence in Africa and since 1960 France has intervened 50 times on the continent, often to support pro-Paris regimes. This means that they have never been hesitant to inject their politics directly into member states. This has included support for Gazimbi in Togo, Idriss Deby in Chad, Paul Biya in Cameroon and Ali Bongo in Gabon. France maintains that its deployments here are primarily about fighting terrorism in the Sahel but it is clear they are propping up pro-Paris leaders usually to defend interests of French companies in the region. For example, French troops are deployed in Niger to secure uranium mines run by the French state-owned company Areva, important for France’s nuclear industry. In addition, since propping up Omar Bongo in the mid-60s, France has maintained a strong military presence in Gabon. This has massively benefited the French company TotalEnergies which has been extracting Gabonese Oil and uranium for over 80 years. Gabon is now under the leadership of Ali Bongo, Omar Bongo’s son. It is therefore clear to see that this colonial currency is still used today as a form of French neocolonialism.
However, many disagree with these critics and argue that the CFA franc is not based on neocolonialism but monetary cooperation. Many argue that the under-development of the Franc Zone is due factories independent of their monetary and exchange policies. They use several arguments to try to prove this. One of these arguments is that since it is pegged to the Euro it has allowed the currency to be seen as a credible and stable one at that, providing low inflation and a chance to avoid the currency crises seen in neighbouring countries such as Guinea, which chose to leave the CFA zone post-independence. This argument can be seen as flawed in the fact that nations such as Morocco and Algeria, former French colonies, which mint their own currency are stronger economically than any user of the CFA Franc. However, within sub-Saharan Africa it is evident that the CFA Franc has allowed the zone members to maintain growth with low inflation. For example, within the past 50 years, Côte d’Ivoire experienced an average inflation rate of 6 percent, a rate much lower than its neighbour Ghana, which averaged an inflation rate of 29 percent.
Another of these arguments is that because of the currency's credibility and stability and the zone’s voluntary membership, Mali chose to rejoin the CFA zone in 1967, while Equatorial Guinea, a former Spanish colony, and Guinea-Bissau, a former Portuguese colony, also later became members. Supporters further argue that the CFA zone appears attractive for FDI because of its stability. This argument is severely flawed because over 2013–18, FDI was greater in Ghana than the whole of UEMOA.
Who benefits from the CFA Franc?
It is evident that the CFA Franc has provided low inflation rates and thus stability in the CFA zone. But has this stability been able to facilitate equal growth and equality in the region?
The African elite benefit greatly from the CFA Franc in several ways. As a result of the CFA Francs being overvalued, exports are hindered whilst imports are cheaper. This only goes to serve and benefit those who can afford the manufactured imports, the elite. Without limits on the currency’s convertibility to the Euro, crooked leaders can serve the interests of the elite as they can transfer boundless amounts of money out of the country and store their wealth, in euros, in European Banks. They are less concerned about the development of their countries but more so about maintaining political control and keeping their wealth. And it is for these reasons, the elite are largely in favour of the CFA Franc.
The CFA zone has a high dependence on producing and exporting a limited number of primary commodities. This has created a very narrow industrial base and a high dependence on imported manufactured goods. This in turn has limited intra-regional trade; intra-regional trade accounts for 11 percent of the external trade of UEMOA countries and just 6 percent of CEMAC countries. Those benefiting are the ones selling goods manufactured using these raw materials back to Francophone Africa, largely the EU, which is overwhelmingly the zone’s largest trading partner.
Does it benefit the French more than the Francophone countries? Political analyst Gary Busch has written extensively on this subject and argues the CFA arrangement is the ‘biggest Ponzi scheme you’ve ever seen’. He claims the reserves in the French Treasury have been invested in the Paris Bourse with the French Treasury pocketing any profits. He goes further to make the allegation that during the 2008-09 financial crisis, the funds in the operations account were pledged against the huge loans made to the failing euro zone countries. Essentially, the foreign reserves of some of the world’s poorest countries were risked to protect European states from bankruptcy. However this scepticism is deeply misplaced. The borrowing cost on French government debt was just 0.12% at the end of 2019, lower than the 0.75% interest it pays to UEMOA and the reserves can simply not be spent, they would have to be placed in safe assets where returns would possibly be lower than is currently earned at the French Treasury.
However it is clear that the French still benefits as it can exploit the regions using its companies through its economical, political and military influence.
The Future
In recent years, the voices calling for the abandonment of the CFA Franc have been growing louder. In 2017, the French President, Emmanuel Macron, declared in a speech at the University of Ouagadougou, Burkina Faso that ‘Francafrique’ - the French strategy of exerting military, political and commercial influence over its former colonies in Africa - is now over. He went further to say, “I am from a generation that doesn’t come to tell Africans what to do,”, which prompted an applause from the students present.
That same year, the NGO, SOS Pan-AFrica, led several protests in African and European cities against the CFA Franc. Later that year they also announced a boycott of French goods. In January 2019, Italy’s former deputy prime minister and current minister of foreign affairs, stated “France is one of those countries that by printing money for 14 African states prevents their economic development and contributes to the fact that the refugees leave and then die in the sea or arrive on our coasts.” Many African elites also voice similar sentiments. In 2010, then Senegalese President Abdoulaye Waye stated “after 50 years of independence... if we get our monetary power back, we will manage better.’ Kako Nubkpo, a Togolese economist and official at the UEMOA, called the system “voluntary servitude.”
In response to rising pressure, Macron along with Côte d’Ivoire President, Alassane Ouattara, announced changes to the West African CFA franc on December 21, 2019. These include members of the West African CFA zone no longer having to deposit 50 percent of their foreign exchange reserves in the French Treasury, a French representative will no longer sit on the board of the UEMOA central bank and a name change to ‘Eco’. The new currency will still remain pegged to the Euro. This does not affect the Central African CFA Franc, but it is likely that they will follow suit.
In May 2020, the French National Assembly agreed to end the French engagement in the West African CFA franc. The broader Economic Community of West African States (ECOWAS), of which the members of UEMOA are also members, plans to introduce its own common currency for its member states by 2027, which they have also formally adopted the name of ‘eco’ for. This plan has received support from nations such as Guinea and Ghana but whether the 15 ECOWAS states can meet the stringent requirements in order to adopt the ‘eco’ will only be revealed in the future.