from Africa in Transition

The CFA and African Economic Growth

January 20, 2012

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Sub-Saharan Africa

Two colleagues at the Council on Foreign Relations have published a short article for non-experts on the CFA franc, the common currency used by fourteen francophone African states that have a combined population of 123 million people. Read it here.

Their article looks specifically at what the future might be for the CFA if the Euro were not to survive. Their discussion also includes useful background on where the CFA comes from and the role it plays in West Africa and how future African currency unions might work.

They note that the CFA was established more than sixty years ago by France, which continues to back the currency by guaranteeing its exchange rate with the Euro, as it did with the French franc. The authors posit that if the Euro does not survive, the CFA would likely be pegged not to a resurrected French franc but rather to a basket of currencies and that it would no longer have the backing of the French treasury. This latter point would not matter as much in the future as it has in the past. The authors note that as recently as 1995, 49 percent of CFA country exports were to Europe. Now, they are less than a third.

There is also a brief discussion of the possible consequences should there be a devaluation of the CFA were it to be delinked from the Euro. Simply put, African exports would become more competitive and imports more expensive, as happened in 1994, when the CFA was devalued some fifty percent. They point out that oil and other commodity exporters would benefit, while oil importers and the consumers of foreign goods and services would pay more. They also observe that in much of Africa, only a small elite consumes most imported goods and services.

I am not an economist or a development professional, and I think the Euro is likely to survive. And it seems to me unlikely that the Anglophone African countries are going to move to a common currency anytime soon. But, in too many African countries, economic policy benefits the elites who control the state, not the mass of the population.