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From CFA franc to Eco: evolution of a controversial currency

From CFA franc to Eco: evolution of a controversial currency

Currency

<p>Changes to the <span class="caps">CFA</span> franc used by 14 African states, announced over the weekend by Ivorian president Alassane Ouattara and his French counterpart, Emmanuel Macron, continue to drive debate across the continent.</p> <p>In this article, we share key details about this currency that has been in use for nearly three-quarters of a century.</p> <h2 style="font-size:16px;">Colonial origins</h2> <p>The <span class="caps">CFA</span> franc, its initials come from the French words for African Financial Community, was launched on December 26, 1945 as a “franc of the French colonies of Africa.”</p> <p>Fourteen nations, divided into West and Central African groups, use the currency today.</p> <p>Their 155 million people account for 14 percent of Africa’s population and 12 percent of its <span class="caps">GDP</span>, according to the International Monetary Fund (<span class="caps">IMF</span>).</p> <p>Two different <span class="caps">CFA</span> Franc users</p> <p>Eight countries comprise the West African Monetary Union (<span class="caps">WAMU</span>), Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal and Togo.</p> <p>Its Dakar-based issuing authority is the Central Bank of the West African States (<span class="caps">CBWAS</span>).</p> <p>Six others are in the Central African Economic and Monetary Union (<span class="caps">CAEMU</span>): Cameroon, the Central African Republic, Chad, Equatorial Guinea, Gabon and Republic of Congo.</p> <p>Its issuing authority is the Cameroon-based Bank of the Central African States (<span class="caps">BCAS</span>).</p> <h2 style="font-size:16px;">European links</h2> <p>The currency’s value was initially pegged to the French franc and then to the euro, at a fixed rate of 655.96 <span class="caps">CFA</span> francs to one euro.</p> <p>The Bank of France holds half of the currency’s total reserves. France pays a ceiling interest rate of 0.75 percent annually.</p> <p>The arrangement guarantees unlimited convertibility of <span class="caps">CFA</span> francs into euros and facilitates inter-zone transfers.</p> <p><span class="caps">CFA</span> notes and coins are printed and minted at a Bank of France facility in the southern town of Chamalieres.</p> <p>Both regional African banks that supervise the <span class="caps">CFA</span> variants have established price stability as their overriding objective.</p> <h2 style="font-size:16px;">Calls for change</h2> <p>Supporters of the <span class="caps">CFA</span> franc say the link to France provides currency credibility and price stability.</p> <p>Critics say the arrangement is “post-colonial,” preventing countries from exercising monetary sovereignty and enabling France to wield clout in its former colonies.</p> <p>Options put forward in the debate have ranged from a symbolic name change to pegging the <span class="caps">CFA</span> against a basket of currencies including the euro, the US dollar and Chinese yuan, thus taking Africa’s main trade partners into account.</p> <p>Some economists have urged the transfer of <span class="caps">CFA</span> reserves to other institutions and an end to strict monetary policy in order to spur development and job creation.</p> <h2 style="font-size:16px;">Rise of the ‘Eco’</h2> <p>Under a major reform announced on Saturday, the western <span class="caps">CFA</span> franc will change its name to the eco.</p> <p>Its countries will no longer have to lodge the 50 percent of their reserves with the Bank of France. They will be able to invest this money where they see fit.</p> <p>France will also sever institutional ties, withdrawing from the <span class="caps">CBWAS</span> board and monetary policy committee and the <span class="caps">WAMU</span>’s banking commission.</p> <p>However, the eco will maintain its fixed exchange rate with the euro.</p> <p>And France will keep its role as a backup for the eight <span class="caps">WAMU</span> countries. France will provide a guarantee, in the form of a line of credit, if the <span class="caps">CBWAS</span> faces a currency crunch and needs euros.</p> <h2 style="font-size:16px;"><span class="caps">ECOWAS</span> and the Eco</h2> <p>The shift by the eight nations is being described by France as a “precursor step” to creating a single currency by the 15 members of the Economic Community of West African States (<span class="caps">ECOWAS</span>).</p> <p><span class="caps">ECOWAS</span> countries this year agreed to adopt a single currency, also called the eco as early as 2020.</p> <p>But whether this timetable will be met is far from clear.</p> <p>Seven <span class="caps">ECOWAS</span> countries have their own currencies, and none of them is freely convertible.</p> <p>The big regional player is Nigeria, which accounts for two-thirds of output.</p> <p>On Saturday, Nigeria cautioned that countries have to do more to meet the single currency’s convergence criteria.</p> <p>Almost none of the 15 <span class="caps">ECOWAS</span> countries currently meet the threshold to join: a deficit of less than 3 percent of gross domestic product; inflation of 10 percent or under; and debts worth less than 70 percent of <span class="caps">GDP</span>.</p> <h2 style="font-size:16px;">And the other <span class="caps">CFA</span> franc?</h2> <p>The latest announcement does not, officially, affect the six countries that are members of the central African <span class="caps">CFA</span> zone.</p> <p>But already there are signs of change in this group, notably voiced by Chad and Equatorial Guinea.</p> <p>At a summit in Yaounde last month, the six leaders “decided to launch in-depth thinking on the conditions and framework of a new cooperation.”</p> <p>They tasked the <span class="caps">BCAS</span> with putting forward “an appropriate blueprint leading to the currency’s evolution.” The central bank is to report back “in a reasonable timeframe.”</p> <p><strong><em><span class="caps">AFP</span></em></strong></p>