After nearly three-quarters of a century, the CFA franc used by 14 African states is undergoing major change.
The CFA franc — its initials come from the French words for African Financial Community — was launched on December 26, 1945 as a “franc of the French colonies of Africa.”
Fourteen nations, divided into West and Central African groups, use the currency today.
Their 155 million people account for 14 percent of Africa’s population and 12 percent of its GDP, according to the International Monetary Fund (IMF).
Eight countries comprise the West African Monetary Union (WAMU) — Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal and Togo.
Its Dakar-based issuing authority is the Central Bank of the West African States (CBWAS).
Six others are in the Central African Economic and Monetary Union (CAEMU): Cameroon, the Central African Republic, Chad, Equatorial Guinea, Gabon and Republic of Congo.
Its issuing authority is the Cameroon-based Bank of the Central African States (BCAS).
The currency’s value was initially moored to the French franc and then to the euro, at a fixed rate of 655.96 CFA francs to one euro.
The Bank of France holds half of the currency’s total reserves. France pays a ceiling interest rate of 0.75 percent annually.
The arrangement guarantees unlimited convertibility of CFA francs into euros and facilitates inter-zone transfers.
CFA notes and coins are printed and minted at a Bank of France facility in the southern town of Chamalieres.
Both regional African banks that supervise the CFA variants have established price stability as their overriding objective.
Demands for change
Supporters of the CFA franc say the link to France provides currency credibility and price stability.
Critics say the arrangement is “post-colonial,” preventing countries from exercising monetary sovereignty and enabling France to wield clout in its former colonies.
Options put forward in the debate have ranged from a symbolic name change to pegging the CFA against a basket of currencies including the euro, the US dollar and Chinese yuan, thus taking Africa’s main trade partners into account.
Some economists have urged the transfer of CFA reserves to other institutions and an end to strict monetary policy in order to spur development and job creation.
Rise of the ‘eco’
Under a major reform announced on Saturday, the western CFA franc will change its name to the eco.
Its countries will no longer have to lodge the 50 percent of their reserves with the Bank of France. They will be able to invest this money where they see fit.
France will also sever institutional ties, withdrawing from the CBWAS board and monetary policy committee and the WAMU’s banking commission.
However, the eco will maintain its fixed exchange rate with the euro.
And France will keep its role as a backup for the eight WAMU countries. France will provide a guarantee — in the form of a line of credit — if the CBWAS faces a currency crunch and needs euros.
ECOWAS and the eco
The shift by the eight nations is being described by France as a “precursor step” to creating a single currency by the 15 members of the Economic Community of West African States (ECOWAS).
ECOWAS countries this year agreed to adopt a single currency — also called the eco — as early as 2020.
But whether this timetable will be met is far from clear.
Seven ECOWAS countries have their own currencies, and none of them is freely convertible.
The big regional player is Nigeria, which accounts for two-thirds of output.
On Saturday, Nigeria cautioned that countries have to do more to meet the single currency’s convergence criteria.
Almost none of the 15 ECOWAS countries currently meet the threshold to join: a deficit of less than 3 percent of gross domestic product; inflation of 10 percent or under; and debts worth less than 70 percent of GDP.
And the other CFA franc?
The latest announcement does not, officially, affect the six countries that are members of the central African CFA zone.
But already there are signs of change in this group, notably voiced by Chad and Equatorial Guinea.
At a summit in Yaounde last month, the six leaders “decided to launch in-depth thinking on the conditions and framework of a new cooperation.”
They tasked the BCAS with putting forward “an appropriate blueprint leading to the currency’s evolution.” The central bank is to report back “in a reasonable timeframe.”