Loveless Union Shelters Timbuktu to Congo From Currency Turmoil

  • Western, central Africa politicians debate CFA franc's merits
  • Currency's peg to euro helps it sidestep peers' losses

As Chad President Idriss Deby calls on the nations of western and central Africa to ditch their 70-year-old currency union, the voices of opposition are growing louder.

The prime minister of Ivory Coast, the largest economy in the 14-member CFA franc, says the peg to the euro helps maintain stability and attracts investors. Capital Economics Ltd. and Renaissance Capital argue it keeps inflation down. Deby has his backers, too, with an Ivory Coast opposition leader saying the currency is artificially strong and hobbles competitiveness.

MAP: CFA Franc Zone
MAP: CFA Franc Zone

“The CFA zone is essentially a laughably ill-suited and dysfunctional and loveless marriage that’s being held together for lack of a better option,” said John Ashbourne, an Africa specialist at London-based Capital Economics. Even so, it has “spared the CFA franc-zone from the sort of violent, unpredictable inflation spikes seen in other countries.”

The euro peg has helped the CFA franc avoid the declines seen in most of its emerging-market and African peers as a slowdown in China saps demand for commodities. The currency has fallen 7 percent against the dollar this year, compared with 13 percent for Ghana’s cedi, 24 percent for Angola’s kwanza and the 47 percent plunge in Zambia’s kwacha.

That resilience isn’t necessarily a good thing, said Kako Nubukpo, an economist and a former cabinet minister in Togo. He advocates pegging the CFA franc to a basket of currencies including the dollar, yen and euro.

Economic ‘Handicap’

“The fact that the CFA franc is pegged to a strong currency is a handicap for the competitiveness of our exports,” Nubukpo said from Lome, the Togolese capital. “It’s like a tax on exports.”

The Communaute Financiere Africaine, or CFA, franc is actually two currencies, which serve different parts of the region and have separate central banks but tend to trade together. They were established after World War II to help France’s colonies export goods to the European nation. Initially pegged to the French franc, they’re now set at a rate of 656 francs per euro and are still backed by reserves held in France.

CFA franc versus the dollar
CFA franc versus the dollar
Source: Bloomberg

The economies of the CFA members are mainly agricultural. Ivory Coast is the world’s biggest producer of cocoa beans, which account for about 22 percent of its exports. Among other prominent members, crude oil accounts for 84 percent of Gabon’s shipments and 64 percent of Chad’s.

Member states have a combined gross domestic product of $157 billion and a population of 154 million. By comparison, Nigeria, which isn’t part of the union, has a $568 billion economy and more than 170 million people.

Colonial Masters

President Deby of Chad reignited the debate as his country celebrated 55 years of independence from France. He said in August that nations should start minting their own currencies as a way of distancing themselves from their colonial masters.

Ivory Coast Prime Minister Daniel Kablan Duncan takes a different view, saying in an interview with Bloomberg last month that the franc’s stability makes it easier to attract investors.

A candidate in the nation’s presidential elections this month disagrees.

“We’re not a member of the euro zone, but the fact that we have this strict peg and a fixed exchange rate puts us in the same situation as Greece, but worse,” said Mamadou Koulibaly, a former Ivory Coast finance minister and opposition leader. “Our industry is not competitive, we have low-skilled labor, our economy isn’t diversified. How can we still use the CFA franc?”

Political Challenges

The debate over the CFA franc comes as member state Burkina Faso recovers from its seventh coup in 49 years and the Central African Republic suffers clashes between Muslims and Christians. Ivory Coast’s elections have, in the past, been accompanied by rioting.

Abandoning the euro peg risks piling economic volatility and inflation onto these challenges, according to Yvonne Mhango, a sub-Saharan Africa economist at Renaissance Capital in Johannesburg. Inflation is running at 3.1 percent in CFA member Togo, compared with 17.3 percent in neighboring Ghana, which isn’t in the union.

“Investors haven’t had to worry substantially about inflation and currency risk when investing in those economies,” Mhango said. “Should the peg to the euro be removed, it implies each of those countries want to have their own currencies and control over monetary policy,” risking “inflation and depreciating currencies.”

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