An African monetary union worth watching

Member-countries will need to work much harder to come anywhere close to the integration they are visualising with the common currency project. It is an important milestone in world monetary history

The decade of 2010 could be described as belonging to the field of monetary economics. From the advent of bitcoin, which shaped the discussion on cryptocurrencies, to quantitative easing to negative interest rates, we have seen it all. What was once seen as unconventional monetary policy became conventional. At the very end of 2019, we saw another crucial development in monetary economics — the end of the CFA franc zone in select African countries and a shift to a common currency, the Eco. The common currency bit is not new, as we have the euro, but the ending of the CFA Franc Zone marks the end of France’s colonial hold over its erstwhile African colonies.

 
Colonialism may have ended, but France continued as a monetary colonial power. In 1945, it not only joined the Bretton Woods system, but also created a CFA Franc Zone for its African colonies. CFA then stood for Colonies Francaise d’Afrique (French colonies of Africa), and this was later changed to Communaute Financiere Africaine (African Financial Community).
 
The CFA zone currently has 15 members. All, barring Guinea-Bissau (Portugal) and Equatorial Guinea (Spain) were French colonies. Some countries quit the CFA Zone (Guinea and Mauritiana) and introduced their own currency. Mali left the zone and then rejoined. Within these 15 members there are three sub-groups. The first is the eight-member West African Economic and Monetary Union (WAEMU — Benin, Burkina Faso, Ivory Coast, Mali, Niger, Senegal and Togo), followed by the Central African Economic and Monetary Union (CAEMU — Cameroon, Central African Republic, Chad, Congo, Gabon and Equatorial Guinea). Both have their own currencies (Central African CFA franc and the West African CFA franc, respectively), but these are interchangeable and follow the same rules and values. WAEMU’s headquarters is in Senegal and CAEMU’s is in Cameroon. The 15th member is the Comoros, which is not a member of either group.

 

The CFA franc was initially pegged at 1 CFA franc = 1.7 French franc (FF), and has been revalued (1959) and devalued (1994) in its 75-year history. In 1999, as the FF gave way to the euro, the CFA currencies were also pegged to the euro. Currently, 655.97 CFA and 491.968 KMF (Comorian Franc) = 1 euro.
 
This pegging against the FF and later the euro gives the three currencies unlimited convertibility to the euro. For this service, the central banks of the two zones are required to keep at least 50 per cent of their foreign exchange reserves (Comoros keeps 100 per cent) in a current account with the French Treasury. The French central bank also assists these countries by providing them with a secretariat to hold half-yearly meetings of the CFA franc zone, drafting the CFA franc zone’s annual and economic research reports, and even in printing CFA currency.

 
Within all this, WAEMU’s eight members and seven more African economies plan to launch a single currency, the Eco. The seven members have their own currency. The group of 15 economies is named ECOWAS (Economic Community of West African States) and is broadly based on European principles of monetary integration. The deadline for the single currency project has been getting delayed, the latest deadline being January 2020. To become a member of Eco, the countries are expected to meet a 10-point convergence criterion. The three main points of convergence are: Annual inflation of less than 10 per cent, a public debt/GDP ratio of 70 per cent and a budget deficit of 4 per cent of GDP. Most members, barring Ghana, have barely achieved these targets.

 
On December 21, 2019, the presidents of France and Ivory Coast made the historic announcement that France would no longer manage the CFA Franc Zone, ending its monetary imperialism. The CFA members will not be required to maintain forex reserves and can make the transition to the Eco without glitches.
 
This eventful imperial monetary history of France and western and central Africa is a telling one. How France has dominated the affairs of these countries despite giving them independence in the 1960s is something that has not received adequate attention from monetary scholars. In 1960, then French finance minister Valery Giscard d’Estaing dubbed the dollar’s hegemony as an “exorbitant privilege”, without realising that the FF also enjoyed the same privilege. The dollar built its privilege on its dominant economic position in the world economy, while the FF’s privilege was based on colonial exploits.

 
This monetary history is also not straightforward. Countries opt for a fixed exchange rate system to benefit from the lower inflation of the pegged currency, but France had an inflation problem for most of this period. Now they are moving to a single currency, the Eco, where the idea is to benefit from financial and monetary integration. However, the euro’s experience points to the need for several unions — fiscal, banking, capital markets — for a monetary union to work effectively.
 
The Eco member-countries will need to work much harder to come anywhere close to the integration they are visualising with the common currency project. The Eco project currently is about regaining national pride, as own currencies matter, and will have to find an economic basis soon. Whatever the outcome, the ending of the CFA Franc Zone in 2019 and the possible start of the Eco in 2020 is an important milestone that merits a place in world monetary history.   The writer teaches at Ahmedabad University