[West Africa] CFA Franc Members On Brink Of Shift From French Support

30 JUN 2020

The West African nations that have traditionally underpinned the CFA franc; Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo are on the brink of a monumental shift away from its almost 75-year tradition of French support...or are they? John Moran - from leading global provider of risk, payments and foreign exchange solutions Ebury - explores how we have reached this potential turning point and considers how the situation is likely to progress.

Spotlight on West Africa - Planning on Change

The CFA franc, created in 1945 as part of the region’s colonial French heritage, was originally pegged to the French franc and eventually absorbed by the EURO when France became part of the Eurozone. The CFA franc members were required to keep 50 per cent of their foreign exchange reserves within the French treasury to maintain the EUR peg. 

The 8 member states are part of the West African Economic and Monetary Union, and the wider-reaching Economic Community of West African States (ECOWAS), agreed in late 2019 to drop the use of the CFA franc and replace it with the newly formed of Eco. The Eco would have a new EUR pegged valuation, which has gone unchanged since 1994. Six other countries; Cameroon, Central Africa Republic, Chad, Republic of Congo, Equatorial Guinea and Gabon, which comprise the Central Africa Economic and Monetary Union, also use the CFA franc.

The member states of the ECOWAS have a combined population of over 130 million people and the use of the CFA franc throughout the region have benefited from low inflation and low volatility relative to other African countries. The reserve buffer is not the only value proposition that offers the region stability. France guarantees CFA franc convertibility at a fixed rate and agrees to lend the Central Bank of West African States in the event there are foreign exchange liquidity concerns. These support measures come at a further cost with mandatory representation by the French treasury on the Central Bank of West African States board and have direct statutory input on monetary policy, although largely viewed as not substantive.

In January 2020 the countries of Nigeria, Ghana, Gambia, Liberia and Sierra Leone issued a communication condemning the WAMEU move to unilaterally rename the CFA franc the Eco and migrate from the CFA franc policy adherence. Unlike their anglophone counterparts throughout Africa, much of the demand in West Africa is domestic in nature. In 2019 the United Nations expected West Africa GDP growth of 3.6 per cent in 2020, but that was well prior to COVID-19, which to date has not affected the immediate region with any voracity, and a migration away from the long-standing France-supported CFA franc. These disruptions can surely have a negative impact, but it may also boost a floating currency which historically encourages industrialisation and help boost the production of manufactured goods. The larger concern of higher interest rates and currency volatility throughout North and South Africa may also be concerning for the central banks.  

Ironically France has been a supporter of the West African Eco change over pushing for the region to have complete monetary independence and granting the sovereignty some basic rights such as regulating territorial currencies, currency valuation and the right to produce notes and coins.  This comes as a bit of surprise as it has been long thought that the French treasury deposits of the ECOWAS were a significant factor in financing French sovereign debt.

It is important to note that whilst France will relinquish its influence on the monetary union and reserves will no longer be required at the French Treasury, it will continue to support the peg of the Eco to the Euro and if there is a shortfall to pay exporters France will cover these payments. The catch? This trigger allows France back in the mix on the region’s monetary policy committee which can reset the entire balance of power, causing a yo-yo effect.  

If you have any questions or concerns about your currency risk or payment needs in the African region or any other location, Ebury can help: 


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