Striking a sour note: why the CFA franc’s days as legal tender could be spent

Shared by 14 countries across West and Central Africa, the CFA franc often divides opinion. Now, as opposition towards the controversial currency mounts, its future on the continent is being brought into question

Striking a sour note: why the CFA franc’s days as legal tender could be spent
A franc discussion: for many decades, the CFA’s central position in Africa’s monetary system continued unquestioned – those days are gone 

Although filmed just two years ago, the video of pan-African activist Kémi Séba setting fire to a 5,000 CFA franc banknote (worth around $8.43) in front of a cheering crowd in Dakar, Senegal, is already a piece of West African lore. By burning the note, Séba, a French national who was born Stellio Gilles Robert Capo Chichi, ignited a tinderbox of anti-French anger. The stunt – provocative and controversial in equal measure – was an embarrassment for local authorities, who swiftly arrested Séba. It also made him a symbol of the struggle against the CFA franc, a currency used in 14 countries across West and Central Africa.

Anti-CFA demonstrations are not rare in these parts of Africa. In 2015, rallies against the currency were held in Cameroon and Togo, and even in France itself, activists frequently travel to the town of Chamalières to protest the CFA franc in front of the mint where the currency is produced. But it was Séba’s stunt that lent a face to a movement that had been simmering under the surface for many years – if not decades.

As Fanny Pigeaud, a journalist who co-authored the book L’arme Invisible de la Françafrique: Une Histoire du Franc CFA with economist Ndongo Samba Sylla, told World Finance, technology turned Séba’s actions into a piece of history: “Séba’s gesture was symbolic, but it had a significant impact on public opinion, thanks to the media and social networks where it was widely shared. Filmed and photographed, it made more visible the fight against the CFA franc that social movements have recently revived.”

A colonial legacy
Two separate currencies share the CFA acronym: the West African CFA franc, which is in circulation throughout the West African Economic and Monetary Union (WAEMU), and the Central African CFA franc, which can be found across the Central African Economic and Monetary Community. Combined, the currencies are present in Benin, Burkina Faso, Cameroon, the Central African Republic, Chad, the Republic of Congo, Côte d’Ivoire, Gabon, Equatorial Guinea, Guinea-Bissau, Mali, Niger, Senegal and Togo. As the French Treasury backs both currencies, they have always held the same monetary value.

Radical critics perceive the CFA franc as an odious remnant of the colonial era that encroaches on the sovereignty of African states

The CFA franc’s troubled history is apparent in its name. From 1945 to 1958, the acronym stood for ‘colonies Françaises d’Afrique’, but the wave of decolonisation that swept through Africa in the late 1950s compelled authorities to swap the controversial term ‘colonies’ for ‘communauté’. Eventually, the two monetary zones picked their own versions of the acronym, with West African countries sticking to ‘communauté financière Africaine’ and Central African ones opting for ‘coopération financière en Afrique centrale’. When French President Emmanuel Macron visited the region in 2017, he hinted that a name change would be welcome, expressing France’s determination to let members of the CFA zone decide the future of the currency for themselves.

Since its birth in 1945, the CFA’s status has been intrinsically interwoven with the economic history of the former colonial power. Following the end of the Second World War, the French franc was sharply devalued to reach a fixed exchange rate with the US dollar and meet the criteria outlined in the Bretton Woods Agreement. The devaluation was challenging for a country that had emerged from the war victorious, but in a far more precarious economic state than before. As a result, French authorities found it impossible to continue supporting the country’s African colonies, instead opting to create a new currency tailored to the economic conditions of Françafrique (French-speaking Africa) and sparing it the impacts of devaluation.

But as critics of the currency claim, what appeared to be an act of economic prudence was, in fact, a well-calculated gambit of the French Government to keep control of its African empire. Not all French colonies trod the same path, however: Guinea ditched the currency in 1959, with Mauritania and Madagascar following suit in 1973. Mali also briefly left in 1962, before rejoining in 1984.

Since France officially joined the eurozone in 1999, the CFA has been pegged to the euro. As such, monetary policy, including the crucial task of setting interest rates, is not designed in Paris (never mind Dakar or Abidjan), but in Frankfurt, home of the European Central Bank. For its part, France guarantees the currency’s convertibility to the euro. In return, the French Treasury retains half of the CFA zone’s foreign exchange reserves, while French officials sit on the boards of both CFA central banks.

Pan-African activist Kémi Séba ignited a tinderbox of anti-French anger when he set fire to a 5,000 CFA franc banknote (worth around $8.43) in 2017

The rise of the anti-CFA movement
For many decades, the CFA’s central position in the region’s monetary system continued unquestioned. Those days are gone: radical critics now perceive it as an odious remnant of the colonial era that encroaches on the sovereignty of African states. Dr Ken Opalo, an assistant professor at Georgetown University’s School of Foreign Service, told World Finance: “The anti-CFA movement is merely a reflection of a growing sense that the decolonisation settlements in the 1960s were not as good as many imagined them to be, and the CFA remains to be a clear expression of that imbalance.”

Dr Cheikh Ahmed Bamba Diagne, Director of the Laboratory for Economic and Monetary Research at the Cheikh Anta Diop University, believes it is a generational, rather than an economic, gap in the world’s youngest continent that explains the rise of the movement: “After 75 years, we can say that this currency has had its day and the continent’s young people want a break with France. That makes sense politically and ideologically, but an exit requires serious preparation to avoid macroeconomic destabilisation. Those opposing the CFA franc do not have technical arguments. [Instead,] they often use the terms ‘sovereignty’ and ‘freedom’ – and rightly so.”

Critics cite a sharp devaluation in 1994 – enforced by the French Government of Édouard Balladur in spite of opposition from a number of African leaders – as an example of the system’s flaws. Although the devaluation was followed by an economic growth spurt, it also sparked social turmoil, reducing purchasing power and increasing public debt. Opponents claim the status quo benefits France rather than French Africa: by keeping half of the CFA’s currency reserves, France finances part of its own debt.

Diagne, however, believes this amount is negligible: “The foreign exchange reserves of WAEMU represent less than 0.18 percent of France’s GDP, so how can they finance France’s debt?” The CFA monetary system also favours French companies operating in the region, with the likes of Castel, Bouygues, Bolloré, Total, Orange and Alcatel being able to avoid exchange rate risks and save on hedging and transaction costs.

While the CFA franc has avoided hyperinflationary episodes, it has deprived countries of learning how to manage a currency

A particularly contentious issue is the currency’s convertibility to the euro, which, according to opponents of the CFA, encourages capital flight. Martial Ze Belinga, an economist and the co-author of an influential book on the currency, told World Finance: “Free movement of capital, which was logical when African countries belonged to the French Empire and constituted a single institutional space, is now the source of tax evasion and outflow of capital that is not favourable for savings.”

The irony, according to Pigeaud and Sylla, is that the French guarantee of convertibility to the euro is practically non-existent – in the French budget for 2018, the amount allocated to the guarantee was zero. “If the French Government does not allocate any funds to honour its pledge to guarantee convertibility, it is because it relies on solidarity between African states through the centralisation of their foreign exchange reserves,” the pair noted in their book. “The currencies of major exporting countries like Côte d’Ivoire and Cameroon make it possible to offset the low levels of countries with fewer resources, such as [the] Central African Republic and Togo.”

From a macroeconomic perspective, critics claim the currency hinders industrialisation, as growth-driven policies are subordinated to the goal of monetary stability. The mandate of the two CFA central banks focuses on defending the fixed parity, effectively limiting the amount of financial credit accessible to African companies. Proponents counter that low levels of industrial development should be attributed to a lack of infrastructure and low productivity, rather than the currency itself.

Dr Abdourahmane Sarr, a Senegalese economist who previously served as the IMF’s macroeconomic advisor to the WAEMU central bank, told World Finance: “To the extent that the exchange rate may have been overvalued, at times it may have helped constrain industrialisation and subsidise imports to the detriment of exports. That was certainly the case before the devaluation of 1994.”

Déjà vu
For many, the currency’s biggest flaw is that it’s overpriced – its peg to the euro makes exports from the largely agricultural economies of the CFA zone more expensive than they should be. This arrangement, Pigeaud and Sylla argue, offers the African middle and upper classes valuable purchasing power, allowing them to buy foreign products that could have been manufactured locally. What’s more, Sylla told World Finance that France adopts a somewhat hypocritical stance when it comes to the eurozone: “French authorities are the most vocal critics of the euro’s overvaluation over the last 20 years. Yet, they always tell African governments that the peg to the euro is good for their economies and provides them ‘stability’.”

Supporters of the CFA claim that the peg – coupled with guaranteed convertibility – strengthens the zone’s attractiveness to foreign investors. According to Sylla, though, » this view is not supported by the data, with the UN Conference on Trade and Development’s (UNCTAD’s) World Investment Report 2019 showing that Ghana received a greater amount of foreign direct investment (FDI) between 2013 and 2017 than all of the WAEMU countries combined (see Fig 1). IMF data also shows that a fixed exchange rate is not necessarily a boon for sub-Saharan African countries: since 2000, those operating with fixed exchange rates experienced lower levels of economic growth than those with a floating currency.

The recent European debt crisis has added fuel to the fire, leading those who oppose the CFA system to question how a currency deemed overvalued for Southern European economies could meet the needs of sub-Saharan ones. “Debates around the euro have played a role, especially in the way critiques of the CFA are received in France, as the currency’s post-1994 architecture mimics the governance framework of the euro,” Belinga said. “Critics of the euro have thus become more sensitive to the issue of [the] CFA franc.”

One such critic is Luigi Di Maio, Italy’s deputy prime minister and leader of the ruling Five Star Movement, who has labelled the currency as a form of exploitation that encourages young Africans to migrate. “France is one of those countries that, by printing money for 14 states, prevents development and contributes to the departure of refugees,” Di Maio, whose party has toyed with the idea of holding a referendum on the euro, said in January.

France’s weak growth over the past decade has also raised questions over its role in African affairs. Douglas Yates, an expert in African politics who teaches at the American Graduate School in Paris, told World Finance: “The impression of France’s continual strength – that is, its ability to dominate through the CFA – [is] a paradox of sorts, [with] France being both too strong and too weak in its former African colonies.”

Serving the elite
Bar some exceptions – such as President of Chad Idriss Déby, who has called for a reform of the CFA zone – local elites are typically in favour of maintaining the status quo. As Pigeaud explained to World Finance: “African elites, especially those in power or aspiring to be in power, do not dare to publicly criticise the CFA franc because they are afraid of retaliation from France. Some of them also benefit from the CFA system thanks to the free transfer of capital, as they can freely invest their assets in Europe.”

Although no credible polls have been conducted on the issue, urban middle classes are thought to be in favour of the currency as it ensures price stability – inflation in the CFA zone rarely surpasses three percent, which is significantly lower than the average of nine percent recorded in the rest of sub-Saharan Africa. CFA countries have also dodged the hyperinflation crises that frequently hit countries like Zimbabwe, whose annual inflation rate stood at 175 percent in June.

“The benefit of the CFA franc for member countries is monetary discipline,” Sarr said. “It helps avoid [the] monetary financing of fiscal deficits [that] would most likely find their way [into] current account deficits.” But for those who reject the current monetary system, the price for stability is too high to pay. Belinga told World Finance that while the CFA franc has avoided hyperinflationary episodes, it has also deprived countries of learning how to manage a currency, including the use of hedging strategies and the anticipation of crises. For Belinga, those who oppose change by invoking the risk of hyperinflation suffer from a “lack of confidence in local [African] management and the irrational fear of assuming sovereignty”.

Eco worrier
If supporters and detractors of the CFA have one thing in common, it’s a shared belief that some kind of reform is necessary. Radicals suggest the use of a new currency that is purely African and unshackled from the CFA franc’s controversial past is the way forward. In fact, many have pinned their hopes on the ‘eco’, a proposed currency that the Economic Community of West African States (ECOWAS) hopes to launch in 2020. Leaders from ECOWAS nations – which include eight CFA countries – met in the Nigerian capital in July to discuss details of the plan, notably the currency’s exchange rate. The currency is expected to boost trade in West Africa by cutting transaction costs and creating economies of scale for exporters and foreign investors. According to BNP Paribas’ CFA Franc: A New Stress Test report, intra-zone trade within the WAEMU currently lingers around 10 percent of total trade flows.

The project is awash with difficulties, though, and has been postponed several times as a result. Like the eurozone, the ‘eco zone’ will include economies with varying degrees of development, making convergence a distant goal. Some economists have also raised questions over the extent to which a common currency would boost trade. As Opalo told World Finance, few countries are ready for such a radical change: “It is highly probable that, come next year, the currency launch will be postponed again. The region’s economies are still not able to support a common currency. Almost none of the countries will be able to meet the fiscal guidelines required.”

For smaller countries, the biggest worry is that Nigeria, which dwarfs all other economies in the region, will dominate monetary policy. In 2018, Nigeria’s GDP was more than three times that of all WAEMU countries combined (see Fig 2). “These fears are warranted,” Diagne said, pointing to the current imbalance within the West African CFA zone that sees Côte d’Ivoire practically call the shots. “The zone’s monetary policy is more in line with the needs of [Côte d’Ivoire] than the rest of the WAEMU members. So what do you think will happen with an ECOWAS currency where Nigeria represents 74.1 percent [of the zone’s GDP] and the remaining 14 countries 25.9 percent?”

Opponents of the CFA franc dismiss these fears as scaremongering. As Belinga told World Finance: “Nigeria is the natural leading country of this region. There is no reason to be alarmed. An irrational fear has been inculcated in the elites of French-speaking Africa against Nigeria and English-speaking Africans. It is time to free ourselves from these colonial complexes.”

Opalo, meanwhile, believes the advent of the eco may be a tipping point in the undeclared war between France and Nigeria for regional hegemony: “If the eco is launched – a big ‘if’ – it will signal a symbolic break with French domination of West Africa. France has always fought Nigeria for supremacy in the region, and the eco would be a significant coup for Nigeria.”

One continent, one currency
The prospect of a purely African common currency has sparked hopes that the whole continent could one day follow in the footsteps of the eurozone and share the same legal tender. One project that charters a path towards such a future is the proposed African Monetary Union, which, under the auspices of the African Union, mandates the establishment of a central bank by 2020, followed by the introduction of a pan-African currency. Critics, though, have continually questioned the feasibility of such a monetary union.

With the continent comprising 54 countries – ranging from the populous Nigeria to the tiny Lesotho; the economic powerhouse of South Africa to the laggard Niger – sceptics fear hopes of African unification are unrealistic. Belinga, however, believes that all hope is not lost and integration is possible, principally because Africans want it: “Paradoxically, the most powerful argument for integration does not lie in the economy, nor politics, but in the strong belief of people in pan-Africanism, which contrasts with the scepticism that always surrounds the idea of a common Europe or a single European currency.”