Reigniting an old debate
Dr Carlos Lopes, former Executive Secretary of the Economic Commission for Africa, last week reignited the perennial debate on the suitability of the CFA franc for franc zone economies, calling it antiquated. “No country in the world can have a monetary policy that remains unchanged for thirty years” he said, adding it was an “outdated and inadequate” system.
The central bank governors of the West African and Central African CFA franc zones have strongly defended the current monetary regime, stating that the currency is not in crisis. The CFA franc central bankers add that the currency offers monetary stability in the face of plummeting commodity prices, which cannot be said for countries with similar challenges outside the CFA franc zone. This is true to an extent. Franctrade notes that countries including Nigeria and the Democratic Republic of Congo have indeed seen their currencies seriously pressured by weak commodity price. Nigeria was compelled to drop its peg to the dollar in June (a weaker Nigerian Naira will erode the competitiveness of franczone economies who benefit from Nigerian demand, especially for agricultural products). Moreover, inflation has remained low in franczone economies in comparison to the sub-Saharan African average.
How about the economy?
A key criticism levied at the CFA franc regime is an operational one: member states have to keep 50% of their foreign exchange reserves at the French Treasury. This is down from 100% prior to 1973 and 65% prior to 2005. That said, it is perhaps the slow progress in interregional trade which should cause greater concern particularly as the West and Central African CFA francs are not directly convertible. We believe the debate on currency independence must be accompanied by a debate on diversifying the economies of franczone countries.