While sub-Saharan Africa has proven largely successful in its bid for political sovereignty in the 20th century, a growing faction is arguing that many countries have yet to win over their economic sovereignty. The target of their activism? The CFA franc, Africa’s largest currency union which stems between 14 countries in Western and Central Africa. Established by France after its ratification of the Bretton Woods Agreement in 1945, the CFA franc was originally created to spare French colonies the drastic devaluation of the French franc currency that was needed to maintain a fixed exchange rate with the US dollar. The French Treasury, in turn, was guaranteed by a fixed exchange rate with the French franc that depended upon the deposit of at least 50% of all CFA franc reserves at the French central bank.
Since then, two notable changes have developed: in 1962, the “Franc Zone” split into two different jurisdictions under the Central Bank of West African States and the Bank of Central African States, with the two central banks issuing their own regional form of the currency while the CFA franc remained easily convertible between the two sides. Second, is that the French franc has obviously since given way to the euro, but the CFA franc has continued its fixed exchange rate to the currency at a level where €1 = F.CFA 655.957. In addition to its fixed exchange rate, however, there are several more rules that the two CFA-issuing central banks must adhere to. Not only must both banks maintain at least 50% of their foreign assets with the French Treasury, but that a foreign exchange cover of 20% must be maintained and that all 14 national governments in the union are restricted to spending 20% of the country’s revenue from the year prior.
Although these rules may prove to be pesky obstacles safeguarding the two countries’ fixed exchange rate, the CFA franc is guaranteed unlimited convertibility to the euro, and by forfeiting its monetary policy to the reputable European Central Bank (ECB), may be thought to translate into greater macroeconomic stability in the region, attractive for investment and growth. Opponents of the CFA franc, meanwhile, point to its continued peg with the euro as a sign of “monetary servitude” and “colonial currency,” arguing that it drags back sub-Saharan growth by repealing its ability to make policy. The implications of the currency union have proven incredibly divisive within economic circles, yet it’s worth taking a deeper look at the two sides’ claims.
Annual Inflation of Consumer Prices, 1999 - 2021
Source: International Monetary Fund
On the one hand, tying the CFA franc’s value to ECB policy, which is notoriously hawkish, has, “generally resulted in lower inflation than other countries in Africa” according to Brookings’ Ali Zafar, but that “the trade-off for lower inflation has been slower per-capita growth” and “diminished poverty reduction.” Indeed, consider both inflation and per-capita growth in Western African members of the Franc Zone. While most Franc Zone countries are to have an expectedly similar rate of inflation, sub-Saharan African inflation in blue is consistently much higher than the assumed average of the other countries, at moments reaching three times the average’s level. A lower and less volatile rate of inflation proves attractive for investment opportunities, not only reducing uncertainty for business transactions but favoring lenders (including foreign investors) who will see their fixed-rate investments eaten less into by inflation.
GDP per Capita of the countries of the Franc Zone
Source: Maddison Project Database
The flip side, of course, to lower inflation may include a restrainment of potential economic growth, which Zafar observes and is certainly confirmed when looking at the sub-Saharan average versus the West African Franc Zone. With the exception of the Ivory Coast, which has nonetheless posted much more volatile GDP per capita growth which reflects a low-inflationary environment, sub-Saharan per capita growth has far outpaced most West African Franc Zone economies, particularly since the turn of the century. Higher commodity prices in the 2000’s alongside economic and political reforms are cited as the main catalyst behind sub-Saharan Africa’s boisterous expansion over the last twenty years, a confluence that may nonetheless be negated by an at-times deflationary environment, as seen in the first graph. Deflation often spells out far worse for an economy than high inflation, especially if it’s a developing economy where debt is often issued to finance larger portions of public and private spending. In light of sub-Saharan Africa’s rising debt-to-GDP ratio, deflation or even lower-than-expected inflation may damage countries’ abilities to pay back expensive loans.
In total, then, a brief glance at the key economic barometers of inflation and economic growth may a certainly offer a mixed bag of results for countries adopting the CFA franc, but when push comes to shove, there’s a high opportunity cost to low inflation as it may come at the expense of added economic growth. Insofar as economic growth is a priority over the welfare costs of inflation in sub-Saharan Africa, there should be the case to try to opt out of the Franc Zone and, along with it, a fixed exchange rate with the euro. Nonetheless, the literature and evidence against the CFA franc runs much deeper, which will be the subject of discussion in part 2.