My dear Friends,

You probably noticed there was plenty of toing and froing in Africa by politicians from the global north recently.

Their obvious political aim, is winning African countries as allies in various global disputes. The other factor is Africa‘s wealth in raw materials. Stuff so desperately needed to keep our modern world running -like Lithium, Lead, Nickel, Cobalt and an array of rare earths.

Yet, since 1945, West African and Central African countries already have had a close connection to the global north via a currency – the CFA Francs. So what happened there?

Fact is, three African currencies are pegged to the Euro: the Central African CFA franc(XAF), the West African CFA Franc(XOF) and the Comorian Franc(KMF). This, makes those countries sort of “silent members” of the European Union.

But how did this unlikely alliance between the CFA francs and the Euro came to be? After all, considering the economic fundamentals, the economies in question have little in common. There is something else, I do not understand. Why do so few investors outside France know about this alliance?

We should look closer at this murky alliance and find out why so few investors know about this!

The monetary cooperation

The CFA franc is one of two regional African currencies backed by the French treasury with pegging to the euro. “CFA franc” can refer to either the Central- African CFA franc or the West-African CFA franc. The other currency is the Comorian franc.

In fact, the CFA-franc notes and coins are been produced at Chamalières by the Bank of France ( Banque de France) since its creation in 1945.

Vive la France

Like other colonial empires, France, created their Franc zone within their African colonies. The CFA franc – originally the French African Colonial franc – was officially created on 26 December 1945 by a decree of General de Gaulle.

Officially the currency was established to foster economic integration among the colonies under its administration. Keeping control of their colonies’ resources, economic structures, and political systems was an added “benefit” for the colonial power.

The truth is, once France had ratified the Bretton Woods Agreement in December 1945, the French franc was devalued in order to set a fixed exchange rate with the US dollar and was thus weakened considerably.

To “spare them the strong devaluation”, new currencies were created for the French colonies. Consequently, it became easier for France to export goods to Africa. However, it simultaneously made importing goods to France from Africa much harder.

In a show of her generosity and selflessness, metropolitan France, wishing not to impose on her far-away daughters the consequences of her own poverty, is setting different exchange rates for their currency.

Rene Pleven, French Minister of Finance( 1944-1946), 1901-1990

Members states are:

So, CFA franc is used in fourteen countries: with a combined population of 193.1 million people (as of 2021) and a combined GDP of US$283.0 billion (as of 2021).

Valuation

The Franc of the French Colonies in Africa (FCFA)came with a fixed parity. One CFA franc was to be worth 1.7 metropolitan francs. In 1948 this rate was further revised upward, with one CFA franc now fixed at two metropolitan francs!

This exchange rate was changed only twice, in 1948 and in 1994. Once for the nominal adaptation to the new French franc in 1960 and second, the Euro in 1999.

Because the CFA franc was born overvalued, domestic and export competitiveness was and remains extremely low. The West and Central African economies produce and export primary goods and import nearly everything else.

“We grant independence on the condition that the independent state endeavors to respect the cooperation agreements … The one does not go without the other.”

Michel Debré, French Prime Minister, Letter to the President of Gabun 1960 

Indeed, from its creation, the CFA franc was an integral part of an economic mechanism designed to ensure that France’s sub-Saharan colonies would help rebuild a metropolitan economy lacking the necessary vigour to face international competition. Simultaneously, the metropolitan French economy needed access to sources of raw materials that it could buy in its own currency at below-world-market prices.

Lack of monetary sovereignty

From the 1960s onwards, as more and more former colonies gained their independence, colonial currency blocs around Africa were gradually dismantled.

Meanwhile, the CFA franc kept 14 African countries or 187 million people economically bound to France. It is, in fact, the last colonial currency on the African continent.

Expensive independence

In fact, France had conceded independence to its former colonies only on condition that African political leaders — most of whom had been educated in France — signed “cooperation agreements” governing future relations.

These agreements sought to entrench French sovereignty and hollow out the promise of independence, covering fields ranging from raw materials to foreign trade, currency, diplomacy, the armed forces, higher education, and civil aviation.

Regarding currency, this “cooperation” meant that newly independent countries would have to keep the CFA franc.

By the mid-1970s, the headquarters of the Bank of Central African States (BEAC) and Central Bank of West African States (BCEAO) were transferred to Yaoundé and Dakar, respectively. The initially 100 per cent French staff was then “Africanized,” as were the notes and coins.

Today, the acronym “FCFA” refers to two currencies that are not directly convertible to one another. It refers to both the franc issued by the BCEAO for the West African Economic and Monetary Union and the separate economic and currency community using the franc issued by the BEAC.

Rebellion

Under the leadership of Sekou Toure, Guinea refused to play the game’s rules. After independence in 1958, it exited the franc zone in 1960. In retaliation, French secret services flooded its economy with counterfeit banknotes. According to their own accounts, this sabotage successfully disrupted the Guinean economy.

Togo, under Sylvanus Olympio, also tried to escape the franc zone. On December 12, 1962, the London School of Economics graduate formally created a national central bank. On January 13, 1963, Togolese soldiers trained in France killed him. Togo’s national currency never saw the light of day.

Despite the fierce political repression imposed by the French government, Mali (1962–67), Madagascar (1972), and Mauritania (1972) did however, quit the franc zone.

In 2017 Kémi Séba, a French activist, publicly burned a 5000 CFA franc note in Senegal‘s capital Dakar. An outrageous thing to do. Firstly because in a country so poor, you do not burn money. Séba was immediately taken into custody and expelled from Senegal.

Pillars of control

The CFA franc system has rested on four pillars. The first is the fixed parity between the CFA franc and the French currency (the French franc and, from 1999, the euro).

Next is the freedom of transfer of capital and income within the greater franc zone.

Third is the guaranteed convertibility of the CFA franc at a fixed rate. This means the French Treasury will bail out the BCEAO and the BEAC when they no longer have enough foreign reserves.

In return for this guarantee, France has a statutory right of veto in the BCEAO and BEAC bodies- boards, monetary policy committees, and control organs.

Another counterpart to these “guarantees,” the two central banks are compelled to deposit part of their exchange reserves with the French Treasury. To be precise, 50%-this amounted to 10 Billion Euros in (2019).

Critics claim this money gets invested by the French treasury, and France rakes in a profit as it only pays 0,7% interest to the CFA franc countries. What we do know, the 14 CFA franc countries can not access these exchange reserves.

In simple terms, the French Treasury is facto, the bureau de change of the 14 CFA Franc countries.

Incidentally, it is worth knowing that the Banque de France also holds 85 per cent of the BCEAO’s monetary gold stock.

Post-colonial benefits

A 1970 report by the French Socio-Economic Council listed the “incontestable advantages for France.” So, maintaining the CFA Franc zone was clearly in France‘s interest.

Thanks to the CFA franc, France enjoys a system of control serving its own economic interests. This also costs France nothing since its supposed convertibility “guarantee” has rarely been put into effect. 

The truth is, the French Treasury has often offered negative interest rates (in real terms) for African exchange reserves, meaning that the BCEAO and the BEAC have been losing money — it is as if they paid the French Treasury to keep their foreign reserves.

On the few occasions that African countries have had foreign payments problems, France has appealed for IMF intervention or joined with the IMF to demand a currency devaluation, as in 1994.

Cheap trade and other benefits

Because France could pay the CFA franc countries‘ imports in its own currency, it could save substantially on foreign currency. A bonus in a world where the US dollar is the main currency for international trade.

With regard to the CFA Franc countries, France could maintain a surplus. As a direct result, France had far from a negligible amount of exchange reserves. That in fact have sometimes been used to pay France’s debts.

French companies also have the guaranteed freedom to repatriate their revenue and capital without any foreign exchange risk. This is due to the free-transfer policy and France‘s control over the zone’s exchange and monetary policy.

The CFA franc’s benefits aren’t just for France; they also extend to importers to the African elites. Because the CFA franc is a mechanism to facilitate the transfer of financial resources some African political leaders can rake in huge benefits.

The European Union and Africa’s monetary policy

Since the European Union introduced the Euro, France de facto abolished the Franc. The CFA Franc is pegged to the Euro.

Of course, this gives the currency credibility. The CFA franc is considered a stable currency. This can be seen as a significant virtue compared to other African currencies. At least, that’s what its proponents say.

Despite being pegged to the Euro and the European Union‘s monetary policies, the “FCFA” is defacto still under the thumb of the French Treasury.

The reality is, fourteen Sub-Sahara countries still send 50% of their exchange reserves to France. Little has changed; as long as France keeps the European Union informed, she is largely at liberty to exercise sole control over the currency.

However, it cannot be disputed that France remains active in creating financial detriments stemming from the CFA favouring a particular political party – parties whose allegiance is primarily to France. 

Finding suitable common ground for monetary policy for all European Union members is a challenge. Yet, including countries with totally different economic fundamentals is to the detriment of the weakest economies.

“if today we still have people leaving Africa, it is due to several European countries, first of all, France, that didn’t finish colonizing Africa.” 

Luigi di Maio, Italian Prime Minister, 2019

The choice of a rigidly fixed parity implies the absence of any adjustment mechanism in crisis periods other than “internal devaluation.” This results in harsh austerity policies.

In times of crisis, France and the IMF typically usually advocate policies aiming at reducing demand, in order for franc-zone countries to obtain a balance of payments equilibrium.

Barrier for development

The CFA-Franc zone membership is synonymous with very low levels of regional trade and extreme poverty. Many members face economic stagnation or decline. Corruption, macroeconomic uncertainty and the free movement of resources across most of Francophone Africa encourage serious capital flight.

Endemic capital flight in these countries has seriously reduced domestic and international investment and led to depressed economic growth.

In 2016 Senegal had the same real GDP per capita as in 1960. Meanwhile, Cameroon, Congo, and Gabon lag behind their highest real GDP per capita levels, reached in 1986, 1984, and 1976 respectively.

Due to the European Union’s strict monetary policy, it has become impossible for an average African to secure a loan. Also, the average income in the Franc zone only rose by 1,5% since the currency was pegged to the Euro. In comparison, incomes rose by 2,5% in the rest of Africa.

There is a common understanding amongst economists that apart from the difficulties of the currency being pegged to the Euro, the problem lies in the single currency. The economic power in the 14 countries differs greatly, yet the single currency does not allow for individual monetary policy.

It is also a fact that the CFA-Franc did little to foster an economic block. Members of the CFA Franc Zone export more to France than to other African countries or within the currency block.

The Murky Alliance

Clearly, the CFA franc is not the only factor explaining this weak economic performance. Other African, non-CFA Franc zone countries suffer from the same malaise.

On the plus side, the CFA countries had a low inflation rate due to being pegged to the Euro. Normally not a forte of African economies.

On the negative side, however, the CFA’s value relative to the French franc remained unchanged from 1948 to 1994. Only then was the CFA-Franc devalued by 50% to boost exports from the region.

After the devaluation, 1 French franc was worth 100 CFA, and when the French currency joined the Eurozone, the fixed rate became 1 Euro to 656 CFA Francs.

The truth is “Franceafrique” is a murky alliance that benefited the French economy as much as the African elites. The CFA- Franc is the leech that drains “Franceafrique”.

Yet, the true beneficiary of this murky alliance is China. Central and West Africa`s economic weakness is why China‘s belt and road initiative is so successful there. As a result, China overtook France as the largest economic partner of most former French colonies in Africa, particularly those in the Franc Zone using the CFA Franc currency. 

A true conversion

The control of the economy of “Françafrique” through France and later the EU hindered the capacity for growth in these African countries.

For decades, countries in the CFA bloc and other West African nations such as Nigeria and Ghana have debated creating their own currency to promote regional trade and investment.

However, leaving the CFA is not an easy option for political leaders. Especially for those who were helped to power by France.

Secondly, with Nigeria representing 73.1% of the zone’s wealth, there is a strong fear that satisfying the economic needs of Nigeria would become the chief focus.

The Review

France has only as recently as 2019 reviewed her position. An agreement was reached between the West African monetary union and France to rename its CFA Franc to “Eco”.

So, the newly named Economic Community of West African States(ECOWAS) will launch a new currency -the ECO – in 2027.

On the positive side, some of the financial links with Paris will be cut. From 2027, the bloc won’t have to keep 50% of its reserves in the French Treasury. On the downside, the currency will remain pegged to the Euro, amongst other currencies like the US Dollar.

“Without Africa, France will have no history in the twenty-first century.” 

Francois Mitterand, French President, 1957

Each country must fulfil various entry criteria to join the future ecozone. The criteria were copied from the Eurozone, like a public deficit below 3 per cent of GDP. Or the public debt ratio below 70 per cent of GDP, and a below 10 per cent inflation rate, etc.

The problem, however, is that, except for Togo, a few countries using the CFA franc in West Africa meet the ECOWAS convergence criteria.

This leaves one question open what is this new union really about? Is France finally decolonising for good, or is it just a whitewashing stunt?

Why Investor need to know

As an investor without any investment interests in West or Central Africa, you might ask why you should be interested in the CFA franc and its development.

France is the second-largest economy in the European Union, a G7 and G20 member. So, its decision-making in Africa will have ripple effects on the European Union and the global economy. The refugee crisis is only one example. African countries having mounting debts with China and Russia is another.

Whether France is prepared to give up its domination of the CFA-Franc will matter to investors in Europe and Africa alike. Because, for a heavily indebted France, this might be the last remaining instrument for protecting its own economic interests.

However, the world is changing rapidly. Consequently, there are growing reasons to think that France’s arrangement with its African partners is growing more threatened and unsustainable.

France faces greater diplomatic competition. Other powerful states such as China, India, Israel, Russia, Saudi Arabia, Turkey, and the United Arab Emirates have emerged as new development partners for African countries. 

Investors need to know about France’s relative economic decline. Because it is not only in a region it long considered its own private preserve but also at home.

As a consequence, the above-mentioned will ultimately impact the European Union and, therefore, the global economy at large.

Curated Picks

For years, 78 to be precise, West African and Central African countries already have had a close connection to the global north via currencies – the CFA Francs.

The CFA franc is one of two regional African currencies backed by the French treasury with pegging to the euro. “CFA franc” can refer to either the Central African CFA franc or the West African CFA franc. The other currency is the Comrian franc.

The CFA-francs are used in fourteen countries: with a combined population of 193.1 million people (2021) and a combined GDP of US$283.0 billion (2021).

The CFA franc was born overvalued, and domestic and export competitiveness, therefore, extremely low.

West and Central African economies produce and export primary goods and import nearly everything else.

“FCFA” refers to two currencies that are not directly convertible to one another. It refers to both the franc issued by the BCEAO for the West African Economic and Monetary Union and the separate economic and currency community using the franc issued by the BEAC.

One of the four pillars of guarantees by the French Treasury is the two central banks are compelled to deposit part of their exchange reserves with the French Treasury.

The “Franceafrique” countries are amongst the poorest in the world.

The CFA franc is not the only factor explaining the weak economic performance.

A renamed Economic Community of West African States(ECOWAS) will launch a new ECO currency in 2027.

Some of the financial links with Paris will be cut amongst them, keeping 50% of its reserves in the French Treasury.

Whether the ECOWAS will bring true sovereignty to the eight members remains to be seen.