Liberating Africans from the CFA “franc” trap
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Nowadays, African countries are wooed because they are perceived as the spearheads of the world economy. The Economist, the English weekly newspaper, predicts that in the next five years, seven out of ten fastest growing economies in the world will be in Africa: Ethiopia (8.1 per cent), Mozambique (7.7 per cent), Tanzania (7.2 per cent), Congo (7.0 per cent), Ghana (7.0 per cent), Zambia (6.9 per cent) and Nigeria (6.8 per cent).
Several factors have contributed to these countries’ good economic health: decades of austerity under the iron rule of multiple structural adjustment programs from the Bretton Woods’ institutions (IMF and World Bank) leading to the stabilization of public finances and the establishment of a favorable environment for investment.
In this era of globalization, emerging and fast industrializing countries like China, India, Korea, Malaysia, Turkey and Brazil did not need persuading to invest massively in the region. Other factors have strengthened the dynamics of growth in a good number of Sub-Saharan African countries. The growth in migrants transfers whose volume surpass the amount of public aid to development (PAD), the development of a middle-class able to spend daily from US $ 2 to US $ 20 and whose number has reached 313 million, according to a report of the African Development Bank (ADB), as well as good governance .
These developments have incited American and European investors to revise their strategies in Africa for a redefinition in terms of trade with the countries of the region, with a renewed interest for the expanding markets on the continent.
At the Europe-Africa Summit in Brussels, in early April 2014, there was some talk about a redefinition of a new frame of cooperation. US President Barack Obama has conveyed African Heads of States for a novel US-Africa Summit in Washington DC in August 2014.
Erroneous choice of the CFA zone : High interest rates
Franc zone countries sharing a common currency: the CFA franc, are lagging behind in this economic awakening taking place in Africa. According to the International Monetary Fund (IMF), regional growth rates have been of an average of 5.5 per cent in countries of the West African Economic and Monetary Union (WAEMU) that include eight countries, among which, Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo. Given that population grows on an average by 3 per cent, so to say that the progression of the Gross Domestic Product (GDP) per capita stands only at 2.5 per cent.
Regarding the Central African Economic and Monetary Community (CAEMC), whose member countries are: Cameroon, Central African Republic, Congo, Gabon, Equatorial Guinea and Chad, the average GDP and population growth rate stands at 4.6 per cent and 2.8 per cent respectively, so GDP per capita stands at a mere 1.8 per cent.
As a result, development programs in the franc zone is limited to poverty reduction, with the World Food Program (WFP) helping to feed part of their populations. Like, for example, in Senegal, Niger, Mali, Burkina Faso, Chad and Cameroon.
There are two reasons for this gap: first, erroneous choices underlying the monetary policy of the two franc zone regional central banks : the West African States Central Bank (WASCB) and the Central African States Bank (CASB), second, the absence of progress in economic integration in WAEMU and CAEMC regions . The erroneous choices of these regional central banks in matters of monetary policy stand on one hand on their strategy to fight inflation and on the other, on fixed exchange rate, unlimited convertibility and free transfer of the CFA franc.
In their strategy to fight inflation, the WASCB and the CASB have systematically used higher interest rates to secure price stability in their regions. Such a restrictive credit policy is a product of a poor assessment of the true causes of the rising prices in franc zone countries.
The two central banks associate this to an excess of liquidity – which is misleading since the causes for rising prices are more exogenous than endogenous. Indeed, there exists some inflation flares due to internal factors like insufficiency and instability of agricultural supply. But inflation is essentially imported as it is linked to a rise in oil and food prices. Unfortunately, higher interest rates in the franc zone cannot alter these parameters.
It would have been preferable to promote policies allowing access to easy credits to producers to stimulate agricultural production. This approach would have led to a decline and stabilization of food prices to bring a solution to the insufficient agricultural supply.
The confinement of these regional central banks in an anti-inflationist logic has diverted them from another important aspect of their mission: promoting economic growth in member-countries. According to economist Kako Nubukpo, (Monetary policy and voluntary servitude: management of the CFA by the WASCB, 2007), these banks have deliberately exacerbated the difficulty of access to credits by governments and economic agents to fund their activities by abusing recourse to high interest rate as a tool of monetary regulation.
They have restrained even more the room for manoeuver of these States by putting an end to the outstanding credit that they were entitled up to a maximum of 20 per cent on their fiscal revenue for the past year. Such a situation made them hostages to French budgetary assistances and loans from French commercial banks, mainly: Société Générale and the International Bank of Commerce and Industry, a branch of BNP-Paribas.
In such an environment, only French enterprises can prosper due to their monopolistic situation in a protected market in all key economic sectors, subsidies from France, insurance cover guaranteed by the Compagnie Francaise d’Assurance pour le Commerce Extérieur (COFACE) and the generosity of commercial and central banks in matters relating to discounts and rediscounts.
French commercial banks which are depositories of a large portion of national savings and financial flux accumulate profits by granting short term advances at 5 to 6 per cent to governments to pay for their countries’ imports of oil, food, equipment and other finished goods. They naturally attract speculative capital induced by the liberalization of exchange rates policies and these banks are in situation of permanent excess of liquidity. Meanwhile, interest rates on loans to local enterprises and individuals vary up to 18 per cent. In such circumstances, one cannot be surprised by the weak extension of banking networks (low rate of banking inclusion) characterizing franc zone countries and their deindustrialization.
This high interest rate policy contrasts singularly with central banks practices in the rest of the world. Confronted to a slowdown of economic activities and recession warning that the consequences of the financial collapse of 2008 and the euro crisis pose on the world, these banks advocate for reduction of interest rates policies to facilitate a resumption of business activities.
Since the September 2001 attacks, the US Federal Reserve has fixed at 1 per cent its basic interest rate. It has maintained this policy of credit relaxation and has committed to uphold it at least until 2015. The European Central Bank, the Bank of England and the Bank of Japan have adopted similar policies. In all logic, central banks of the franc zone should have done the same.
Another erroneous choice of the CFA Zone: The CFA franc pegged to the euro and freely convertible and transferable
Regarding foreign exchange policy, the choice of the WASCB and CASB rest on a ridiculously overvalued exchange rate of the CFA franc pegged to the euro with a fixed parity (1 Euro = 655.957 CFA franc), and on the convertibility and free transferability of the currency.
Since its establishment in 1998, the European Central Bank (ECB) applies a policy of strong currency in a bid to raise the ambitions of the Euro in seeking an international reserve currency status. But if Europeans, whose intra-community exchanges stand at 60 per cent, can accommodate with the appreciation of the Euro against the US dollar, it’s not the case for the franc zone countries.
Their intra-regional exchanges are limited to a surprising low rate of 12 percent of their global exchanges and they remain dependent on imports for food products, manufactured goods and equipment. Their exports consist mostly of natural resources: oil, coffee, cacao, cotton, gold, uranium, etc. and are denominated in US dollars. The appreciation of the CFA franc pegged to the Euro vis-á-vis the US dollar naturally laminates the competitiveness of these countries’ exports, exacerbating their deficits and increasing their liabilities.
To add insult to injury, franc zone countries have to pay for all these facilities offered to France, by off-loading their foreign exchange reserves to the French Treasury. It’s all the most incredible that France invests these FX reserves representing tens of billions of US $ in Treasury Bonds that it used afterwards to guarantee loans it raised to fund its own public deficit which, in 2013, represented 4.3 per cent of France GDP, far away from the ceiling of 3 per cent, one of the criteria of the Pact of Stability and Growth of the European Union.
At the dawn of independences, foreign currency deposits required by France to cover the CFA Money Supply stood at 100 per cent. It was reduced to 65 per cent in 1973, then, capped at 50 per cent since September 2005. Reserves in franc zone countries have reached an excessive level. According to the Bank of France, the covering rate of monetary emission of the CFA exceeds 110 per cent when it should have been capped more or less at 20 per cent as per international standards and the statutory agreements signed between France and franc zone countries (Cf. 2009 Report on the Franc Zone published by the Bank of France in October 2010).
Nowadays, for central banks, the general tendency is to avoid accumulating excessive reserves because of losses that they entail. In the franc zone, these losses come from the costs of unused surplus of foreign exchange reserves to finance the acquisition of much needed equipment or to pay back part of the external debt and reduce thereby the payment of interests as well as the costs of return deficiency between the remuneration of 1.5 per cent offered by France and the rate that is highest in the instruments in which these surplus reserves could have been invested and of the cost of deficits generated by currency appreciation.
All this policy of exchange reserves of the WASCB and the CASB is tantamount in reality to a vast subterfuge feeding a fool’s bargain. A fixed parity guaranteeing a strong CFA shields French companies like Bouygues, Areva, Total, Bolloré, Eiffage, Orange, BNP-Paribas, Société Générale, Air France and others against current currency depreciation . The convertibility and the free transfer allow them to exile the massive profits and the fortunes they reap from all the public contracts and the private deals awarded exclusively to them.
Franc zone countries are confronted to chronic structural deficits and serious difficulties of payments while huge amounts of foreign exchange earned after hard work from their populations that could have funded their development are arbitrarily taken away by France. Their economic activities rely mainly on production and export of unprocessed raw materials and mineral resources.
At this primary stage of their development, logic would have it that they adopt a policy of change based on non-convertibility and non-transferability of the CFA franc and a floating and advantageous exchange rate pegged not exclusively to the euro but to a basket of currencies chosen among their main new commercial partners including China and the United States.
To this end, they should declare a regime of exchange rates allowing them to control all their operations abroad. This legal restriction will ensure a strong management of incoming and outgoing foreign currencies that could be allocated in priority to the development of key sectors of the economy.
This monetary policy is that followed by countries like South Africa, Nigeria, Kenya, Ethiopia, Angola or Ghana that appear on the top development list in Africa. This is equally the case for emerging countries like China, India, Korea, Malaysia, Turkey and Brazil.
For example, the Chinese giant, very much concerned not to take any risk on its economic growth by allowing an uncontrolled exit of foreign currency, does not authorize liberalization of its foreign exchange market. The Chinese currency, the “renminbi” is neither freely convertible nor freely transferable. Then, why should the CFA franc be?
The second reason of these dysfunctions affecting the franc zone comes from the failure of economic integration policies with intra-community exchanges choked by customs duty that their member countries levy from each other.
A huge paradox of the CFA franc is that it is the common currency of countries not sharing a common market. The WAEMU and the CAEMC were created in 1994 following the devaluation of the CFA. The convergence criteria retained to harmonize economic integration policies of their members were copied on those of the European treaty of Maastricht. They refer to the maximum levels authorized in matters of inflation, debt and budget deficit.
Development disparity among EU and franc zone countries should have encouraged WAEMU and CAEMC to show more creativity and pragmatism in the choice of convergence criteria. Regarding the level of deficit authorized, for example, they could have only asked for a current structural balance that does not include public investment: a condition better adapted to the realities of the WAEMU and the CAEMC member countries that they would be more able to satisfy. It’s about authorizing the deficits to support economic activity and to set up the bases of future growth. Government debts would be exclusively dedicated to the funding of public investment.
In any case, the difficulties of franc zone countries make it illusory the respect of promulgated criteria and the project of economic union stay, thus, out of order, aggravating thereby structural imbalances.
ECOWAS : Ideal setting of reforms of the monetary policy
The CFA is at a crossroad. It was created in France, on 25 December1945, under exceptional circumstances by a decree signed by General de Gaulle in order to rationalize the exploitation of French African colonies regrouped in two distinct regional federations, in West and Central Africa.
The abolition of the CFA franc had become imperative after France dismantled the federal structures of its colonies following their independence. Great Britain had, under the same circumstances, abolished the “West African Pound sterling”, the common currency of its colonies: Nigeria, Ghana, Sierra Leone and Gambia after these countries obtained their independence.
With France determined to keep alive the monetary policy of its former colonies, former member countries of the franc zone such as Morocco, Tunisia, Madagascar, Vietnam and Laos packed up and quitted in order to pursuit independent monetary policies. With regard to the poor situation in which sub-Saharan franc zone countries find themselves, after more than half a century of independence, it is high time for them to follow suit and set up an independent monetary policy adapted to their economies and the interests of their people still mired in abject poverty, civil wars and military occupation.
The best frame to articulate these reforms in West Africa is the Economic commission of West Africa (ECOWAS) whose fifteen member-countries are Nigeria, Ghana, Cote d’Ivoire, Senegal, Niger, Gambia, Guinea, Mali, Guinea-Bissau, Liberia, Sierra Leone, Benin, Togo, Cape Verde and Burkina Faso, in conformity with the directives of the African Union (AU).
Unfortunately, since its creation, ECOWAS has never stopped being in competition with WAEMU and the CAEMC, two institutions set up by franc zone countries with the unreasonable hope of holding back British, American, Chinese and Nigerian influence in what is perceived as “ La chasse gardée de la France “ : France African backyard.
ECOWAS remains the ideal framework to lead economic and financial convergence policies, with a view to adopt a Common External Tariff (CET) and implement a Customs Union as prerequisites to a successful economic integration, followed by a political union of the region. A popular joke in the intellectual milieu of Lagos is that there are two big powers in ECOWAS: Nigeria and France. Without the goodwill of France, there is no hope for ECOWAS.
The forceful presence on the African scene of countries like China, India, Korea, Malaysia, Turkey and Brazil has given African countries a platform for increased exports. They also have been able to set up a new model of cooperation based on trade, investment and technology transfer. This has widened the options of economic growth and provided a greater margin of maneuver as well as significant opportunities to progress on the path of development. It is high time for franc zone leaders to be part of this new dynamic.
French multinationals are the first beneficiaries of the delusion representing the mechanism of operations of the franc zone. The second beneficiaries are the francophone African elites. The corrupted mode of functioning of the system allows them to enrich themselves with impunity thanks to imports and misuse of public funds that they have no difficulty in transferring to France, while living an extravagant way of life without any common measure with the realities on the ground.
These beneficiaries collect substantial profits to the detriment of African populations, a majority of which is confined in repetitive mass killings induced poverty and hopelessness. As for the French State, it would be opportune to ask for the reality of the benefits that it derives from this system. Despite the quasi total political, diplomatic, military, economic and financial controls that France exercises on its private west African preserve, in half a century, its army has intervened more than forty times on African soil to secure its emoluments, maintain its protégés in power or remove them at its will.
Former colonial powers like Germany and Great Britain that have got rid of their colonial rags and pay cash on the nail at market prices their imports from Africa are in a better economic health than France. In 2013, a report by the French Senate was titled: “Africa is our future.”
Chinese, Indians, Brazilians, Koreans, Malaysians, Turks, amongst others, are done on this reality and have elaborated strategies that have contributed to the forward leap of African countries outside the French influence zone. It is time for the French and francophone African elite leaders to wake up to this reality.
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About Sanou Mbaye (185 Articles)
Sanou Mbaye, ancien haut fonctionnaire de la Banque africaine de développement, est un chroniqueur politique et économique. Ses écrits sur le développement des pays africains proposent des politiques alternatives à celles mises en place, en Afrique, par des Occidentaux et leurs bras alliés : le FMI et la Banque mondiale.