On 20 May, the French cabinet adopted draft legislation aiming at modifying France’s monetary agreement with the eight countries[1] part of the West African Economic and Monetary Union (WAEMU) using the CFA Franc.
This announcement follows the unexpected declaration made on 21 December 2019 by Mr Macron and Mr Ouattara, the French and Côte d’Ivoire presidents, proclaiming the reform of the West African CFA Franc and its new name, the ECO, to be set up in 2020. The declaration took place a few months after the heads of state of the fifteen Economic Community of West African States (ECOWAS) members[2] - including Côte d’Ivoire - had agreed on 29 June 2019 to create a new regional currency named the ECO, having a flexible exchange rate and a federal central bank to oversee the new system.
The draft legislation provides for two elements which particularly crystallized the tensions around the CFA Franc. Firstly, there will no longer be representatives of France in the technical governance bodies of the area, in particular of the Central Bank of West African States (BCEAO) - where France had non-casting votes. Secondly, the BCEAO will no longer be required to deposit at least 50% of its foreign exchange reserves in French Treasury operating accounts.
From now on, the foreign exchange reserves will be placed by the BCEAO where it wishes. In the minds of many Africans, this money, which will no longer be located in the accounts of the French treasury, will be used to finance the development of member countries. However, this idea has practical challenges. Each foreign exchange reserve already has a counterpart which has been created locally, and the currencies are used to support very high imports from African countries which produce little.
Two major elements of the CFA Franc will however remain:
- The first element is the fixed parity which will be maintained between the new currency and the European currency. This is the very heart of the CFA system. France maintains that this parity was wanted by African countries. But critics point out that parity was strongly "recommended" to the African heads of State. This parity has made it possible to preserve real stability and relatively high levels of growth, but it also limited development finance capacities due to the need to stabilize the currency.
- The second element is the unlimited and unconditional convertibility guarantee provided by France. Analysts and rating agencies view this guarantee as necessary or, even essential, arguing that without it, the weak competitiveness of the economies of the CFA Franc zone could have precipitated the member countries into macroeconomic chaos. However, to date, the terms of this guarantee have not been specified. The only known element is that France requires privileged access to macroeconomic information from the WAEMU to maintain its guarantee.
Ratification by French parliament of the draft legislation is scheduled to happen during the third quarter of 2020. We will need to see if such ratification takes place and the impact this reform it will have has on the ECOWAS common currency project.
