Comprising many of Africa’s poorest countries, including those in the Sahel, the CFA franc zone faces particularly daunting economic development and growth challenges in the context of the ongoing COVID-19 pandemic.
Encompassing 14 French-speaking West and Central African countries, the CFA franc zone faces climate change, poverty traps, demographic pressures and obstacles to natural resource management. In addition, the trio of high energy costs, funding constraints and expensive transportation create barriers to competitiveness. Moreover, despite decades of international aid flows, the region has struggled to gain the upper hand in reducing poverty. The COVID-19 pandemic has further magnified the challenges facing CFA franc zone countries and simultaneously led to questions about which fiscal and monetary policies are most conducive to recovery and growth as the global economy continues to grow. adapts to post-COVID-19 market realities.
Since the 1940s, the CFA franc has been pegged to European currencies, first to the French franc and, since 1999, to the euro. Until recently, CFA countries deposited 50 percent of their reserves in the French Treasury in exchange for a convertibility guarantee. While this arrangement has generally resulted in lower inflation than in other African countries and some degree of fiscal restraint, it has significantly limited the macroeconomic policy options available to its member countries. The trade-off for lower inflation has been slower per capita growth (Figure 1) and reduced poverty.
However, the current exchange rate regime presents several macroeconomic issues that hamper the ability of these countries to weather the COVID-19 pandemic. First, pegging to a strong currency decreases the competitiveness of the private sector by effectively subsidizing imports and penalizing exports. As measured by a simple CGE model, in 2020 the CFA franc in the West African Economic and Monetary Union (UEMOA, or UEMOA in French) was 20 percent overvalued, and in the Central African Economic and Monetary Community (known by its French acronym, CEMAC), it was overestimated by 30 percent. Second, the rigidity of the exchange rate forces adjustments to trade shocks on the fiscal side through cuts in public investment or additional debt accumulation. Third, the current system exacerbates inequalities between urban elites and the rural poor by limiting incentives for commercial agriculture. Fourth, since monetary policy is fixed, CFA countries face credit constraints and are unable to use interest rate policy to stimulate the development of small and medium enterprises. Finally, monetary union has failed to accelerate growth for the poorest members, as evidenced by the lack of economic convergence over time (Figure 2).
As CFA member countries plan for a post-COVID-19 future, taking the next step of meaningful currency reform must be part of the package. More precisely, while the 2019 Macron-Ouattara reform ended the reserve deposit obligation and withdrew the French representatives from the Central Bank of West African States (known by its French acronym, BCEAO), it did not revise the exchange rate framework. The modernization of the system must include a serious discussion on alternative exchange rate frameworks that would allow greater monetary flexibility while improving competitiveness, opening the door to export-led growth and realigning incentives for agricultural producers. .
For more on this issue, see my book, “CFA Franc Zone: Economic development and post-Covid recoveryâ, In which I present a political roadmap with a number of stages. First, the exchange rate regime is expected to evolve from the peg to the euro, to a (tripartite) basket peg to the euro-dollar-renminbi that reflects the evolution of Africa’s business models from the West with the world. For CEMAC, which is an oil-rich region, I propose a tie-up to a basket including the euro, the dollar and the price of oil. This reform will balance stability and flexibility, make the currency more market oriented and support African exporters and entrepreneurs. In the CEMAC zone, this will help countries adjust to the volatility of oil prices, while in the UEMOA zone, countries can even embrace integration with specific English speaking countries like Ghana and create a more economic space. strong. Second, it is important to modernize the French convertibility guarantee for the CFA franc, which is unclear, and to negotiate a clear swap line with the European Central Bank to provide a financial cushion during the transition period and downturns. .
Finally, the ultimate goal of the reforms is to have greater African sovereignty and to expand options for fiscal and monetary management in a post-pandemic world. A richer and more prosperous CFA zone will be beneficial not only for West and Central Africa but also for France and the world in general.