Eight West African countries announced their intent to cease using the CFA franc, a France-backed currency used by former colonies in the region, beginning July 1, and renamed a common currency, the Eco.
At a Dec. 21 joint news conference at the Petits Palais in Abidjan, Ivory Coast President Alassane Ouattara and French President Emmanuel Macron disclosed that Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo will no longer use the CFA.
Six Anglophone countries of the economic and political union in the region, Economic Community of West African States, or ECOWAS — Nigeria, Gambia, Ghana, Liberia and Sierra Leone, and Guinea — held a meeting in Abuja on Jan. 16, and condemned WAEMU’s decision to rename the CFA franc, as reported on CNBC.com.
The new currency is slated to launch at the end of the year. Establishing a new currency has been a pursuit of West Africa for decades and talks have been stronger since ECOWAS leaders met last June.
A Central African CFA currency is in use as well, but only the West African CFA will sever ties to France. The currencies are interchangeable.
The currencies are backed by the Banque de France, also known as the French Treasury, and have a fixed exchange rate of 655.957 to the euro.
The Treasury will guarantee the convertibility of the currency and stay as guarantor for the eight WAEMU countries, meaning the Eco will remain pegged to the euro.
A statement from the Elysee communicated the Central Bank of West Africa, or BCEAO, “will no longer have any special obligation regarding the investment of its foreign exchange reserves. It will be free to place its assets in the assets of its choice.”
Ouattara said France will eliminate the need for WAEMU states to hold “50 percent of the reserves in the French Treasury,” which they had been compelled to do, and withdraw any governance over the new currency.
The latest figures from the International Monetary Fund (IMF) has total WAEMU reserve assets held in the Treasury, including deposits and gold, at around €13.7 billion ($15.5 billion) at the end of November 2019.
Instead, the countries will now pool reserves entirely with the BCEAO to guarantee France’s convertibility.
France does not make money on its regulation of the reserves, but actually pays an annual interest rate with a ceiling of 0.75 percent to the region’s two central banks. In fact, France has denied any investment in the reserves.
George Ott, economist at NKC African Economics, says, “The withdrawal of French representatives from WAEMU decision-making bodies and the relocation of reserves to the region will lessen direct French influence on monetary decisions.”
The CFA franc, or Communautw francaise d’Afrique, has been in use since 1945 and was created in the wake of the weakness of the French franc after World War II. Initially tied to the franc, it has been linked to the euro for decades.
“In the WAEMU economies, the euro peg has been a stabilizing factor and has helped to facilitate the noteworthy economic performances of some member states in recent years,” says Ott. “Removing the peg would likely have a destabilizing impact. There is also no agreement on what type of arrangement would work for the region.”
A statement from the Elysee says, “If the BCEAO faces a lack of availability to cover its commitments in foreign currency, it will be able to obtain the necessary euros from France” — or a “line of credit.”
None of the member countries who have used the CFA franc have experienced a financial crisis. Mali, which quit the monetary zone in 1962, rejoined in 1984 after its currency took a nosedive. Similar results occurred for Guinea, Mauritania and Madagascar.
The announcement was a surprise for the group since plans at a summit last June were made for the entire ECOWAS bloc to name a new currency, the Eco.
Despite markets being emotionally driven these days, France’s strong economy should withstand any emotional blows the new currency may be perceived as having. The separation from the French Treasury is seen as a step toward financial independence, as well as a break with the past.
During the December announcement, Macron formally apologized for France’s colonialism in the region, which helped establish the CFA.
“Too often, France is perceived as taking a supremacy stance and has dressed itself in the rags of colonialism, which has been a grave mistake, a serious fault of the Republic,” he stated. He called for “turning the page” on the past.
In a statement to the German news outlet Deutsche Welle, Tokunbo Afikuyomi, chief editor of the Nigerian business publication Stears says, “There has been a lot of pressure in these Francophone countries to reduce France’s influence.”
Ott agrees that in the short-term, the most significant impact may merely be its symbolic element.
“The move will help ease some of the growing anti-colonial sentiment in the WAEMU region by symbolizing the first tangible steps towards monetary independence, in particular, and the establishment of national economic identity and autonomy in general,” he says.