The Franczone: Unloved, But Difficult To Replace

BMI View: Africa's Franczone currency arrangement is widely criticised, but a lack of appealing alternatives means that the system is unlikely to be significantly changed over the coming five years. Reform of some kind is, however, inevitable over the longer term.

Criticism of Francophone Africa's monetary ties to Europe are growing, with one high-profile academic recently describing the Euro-pegged CFA franc as a form of 'monetary nazism'. We expect controversy regarding the region's increasingly archaic currency arrangements to continue, but believe that a combination of French pressure and institutional inertia will prevent any significant shift during the next five years. Change is, however, inevitable over longer term, and we map out three possible scenarios.

Africa's franczone is made up of two economic blocs, the Union Economique et Monétaire Ouest-Africaine (UEMOA) and the Communauté Économique et Monétaire de l'Afrique Centrale (CEMAC). The two unions roughly correspond to administrative boundaries within the former French colonial empire. Each bloc uses a currency pegged to the euro at the same rate (655.957/EUR) but the two units are not interchangeable. The two unions' monetary policies are set by regional central banks, and the convertibility of the currency is guaranteed by the French treasury.

The Franczone
Africa - Countries Using The CFA Franc

The Franczone: Unloved, But Difficult To Replace

BMI View: Africa's Franczone currency arrangement is widely criticised, but a lack of appealing alternatives means that the system is unlikely to be significantly changed over the coming five years. Reform of some kind is, however, inevitable over the longer term.

Criticism of Francophone Africa's monetary ties to Europe are growing, with one high-profile academic recently describing the Euro-pegged CFA franc as a form of 'monetary nazism'. We expect controversy regarding the region's increasingly archaic currency arrangements to continue, but believe that a combination of French pressure and institutional inertia will prevent any significant shift during the next five years. Change is, however, inevitable over longer term, and we map out three possible scenarios.

The Franczone
Africa - Countries Using The CFA Franc

Africa's franczone is made up of two economic blocs, the Union Economique et Monétaire Ouest-Africaine (UEMOA) and the Communauté Économique et Monétaire de l'Afrique Centrale (CEMAC). The two unions roughly correspond to administrative boundaries within the former French colonial empire. Each bloc uses a currency pegged to the euro at the same rate (655.957/EUR) but the two units are not interchangeable. The two unions' monetary policies are set by regional central banks, and the convertibility of the currency is guaranteed by the French treasury.

Modern Institution...

Supporters of the current system argue that the franczone provides economic and monetary stability to its members, many of which are among the poorest and least stable countries in the world. A common currency encourages regional trade while the euro-peg spares resources exporters from the damages of 'Dutch disease' and reduces the exchange rate risk faced by foreign investors.

Inflation Killer?
Africa - BMI 2014 Average CPI Inflation Forecast

Prudent monetary policy, stable exchange rates, and the imposition of convergence criteria by the central banks has also tamed inflation across the zone. Price growth is lower in franc-using countries than almost anywhere else in Sub-Saharan Africa, which supporters say is particularly beneficial to poorer consumers.

...Or Colonial Hangover?

Opponents claim that the rebranding of CFA from ' Colonies françaises d'Afrique' to ' Communauté Financière Africaine' was only for show and that the franczone serves French rather than African interests. They argue that the appreciation of the euro against the US dollar (and Nigerian naira) has crippled local industries and that the requirement that franczone states deposit half of their foreign reserves with the French central bank is a form of imperialism.

Many blame the currency peg for slow growth in Francophone West Africa - one of the continent's least dynamic regions - but BMI believes that this is more likely due to inhospitable business environments (see 'Francophone West Africa To Underperform', 1 November 2013).

A Weakening Economic Axis
Franczone - Share of Exports Sent To Eurozone

Critics also point out that the bloc's economic ties with Europe are weakening, and that the continued existence of the CFA franc is a French attempt to retain economic influence. Some claim that the euro-peg deters Chinese investment, though BMI expects that most foreign companies would prefer to do business using the euro-pegged CFA franc than an unstable frontier currency banked by the national bank of Chad.

No Longer France's Private Hunting Ground
Franczone- Export Destinations, Share of Exports, UEMOA (LHS) & CEMAC (RHS)

Five of the fourteen franczone states already export more to China than they do the Eurozone, though the largest economies remain closely tied to Europe.

Inertia Rather Than Enthusiasm...

Despite these issues, however, there are three key reasons why BMI predicts that the franczone is unlikely to be significantly restructured over the coming decade.

The first is institutional inertia. Transforming or abolishing the zone would require the consent of all 14 members, and conflicting interests will make it difficult or impossible to reach a consensus. Countries reliant on French investment (Côte d'Ivoire, Niger) will fear that a move away from the euro peg could hit economic growth. Small states (Guinea-Bissau, the Central African Republic) would oppose any move towards a system weighted towards the interests of the larger economies.

The key divide will be between oil importers and oil exporters. A weaker franc would boost export revenue in Gabon but exert even more pressure on Senegal's already stretched current account deficit. Given the level of institutional and diplomatic dysfunction that characterises decision-making in the region, we doubt that a solution will be possible except in the very long term (see '20 Years of CEMAC: Little To Celebrate', March 21).

Second, we note that France - and, perhaps more pressingly, French companies - remain highly influential in the region (see 'Crisis Highlights Enduring French Role In Africa', 6 December 2013). French firms, including Bouygues, Total, and Orange are highly influential across the zone and would lobby against any change in the current system, which guarantees them a fixed exchange rate and unlimited freedom to transfer money to France.

Weaker Franc Will Reduce Pressure For Reform
UEMOA - XOF/USD Exchange Rate

Third, we believe that the gradual weakening of the euro - and hence the franc - against the dollar will reduce concerns that the CFA peg is making the franczone's exports uncompetitive. Opposition to the current system grew in 2007 and 2008 when the strength of the euro encouraged significant imports into the zone, and a lower exchange rate will reduce these pressures.

..But Change Is Inevitable

We maintain the view that the current CFA arrangement will last into the 2020s, but do believe that the pressure for reform will eventually become unavoidable. We outline the following possible scenarios in order of decreasing probability.

1) Managed Transition

The easiest way of addressing the complaint that the current system ties the zone too closely to Europe would be to peg the CFA francs to a basket of currencies, as is done in Morocco. A euro-dominated basket might convince France to continue backing the currency, but a wider distribution would require the bloc to build up its own reserves in order to protect against speculative attack. Given the difficulties of the European experience, we doubt that a totally independent franczone would survive without foreign backing.

2) ECOWAS Merger

The UEMOA states have officially decided to join a new currency union with the Anglophone members of the Economic Community of West African States (ECOWAS) by 2015, but we do not believe that the merger will take place in anything but the long term. If eventually implemented, such an arrangement would be highly unstable and almost entirely dominated by Nigeria. Since the CEMAC states are not part of ECOWAS, their union would continue unchanged.

3) Africa's Grexit

The least likely outcome is the unilateral exit by one or more states, perhaps in response to another crisis in the eurozone. Gabon, an oil-rich nation with few ties to its neighbours, would be the most likely to leave the bloc. Its exit would be hugely destabilising for CEMAC.

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