CFA Franc: deconstructing ideas to refocus the economic debate. 

Although often criticized as a tool of French domination, the CFA franc (FCFA) is still  the currency of many of France’s former colonies. This article looks beyond symbolic  issues to show that the FCFA is part of a monetary strategy which, while open to  debate, is economically coherent for these states. 

From the "franc of the French colonies of Africa" to the "franc of the financial communities of Africa".

The FCFA was introduced by decree in the aftermath of the Second World War, under  the name of “franc des colonies françaises d’Afrique”. The decision was prompted by the difference in inflation during the Second World War, which made it impossible to  maintain a one-to-one parity between francs printed in the colonies and those printed  in metropolitan France. At its inception, 1 FCFA was worth 1.7 French francs (FF). 

Following independence, most of these states chose to keep this currency, which has  been maintained under a new name: the “franc des communautés financières  d’Afrique”. This currency, common to 14 countries in West and Central Africa today,  has two main characteristics: it has a fixed exchange rate against the euro (1 euro  equals 656 FCFA), and its convertibility into euros is guaranteed by the Banque de  France and the French Treasury. 

Above all symbolic criticism

Since its introduction in the newly independent states in 1960, the FCFA has been the  subject of much criticism. Its detractors see it as a symbol of Françafrique, the  continued presence of France in its former colonies. The unchanged acronym “CFA”  and the fact that banknotes are still produced in France help to spread this feeling. In  reality, the partial or total relocation of banknote production is common practice,  although difficult to measure. Half of the world’s 171 monetary authorities outsource at  least part of their banknote production, and in Africa only 8 out of 54 countries produce  their currency locally. Currencies such as the Qatari riyal, the Ethiopian birr and the  Macedonian denar are all printed by the British company De La Rue, the market leader.  Consequently, the controversy surrounding the FCFA seems to have more to do with  excessive media coverage than with any real anomaly. 

The choice of offshoring currency production rather than maintaining it locally is  generally motivated by the high costs associated with the latter option, resulting from  the advanced technologies used and their constant evolution to counter counter  counterfeiting. Of course, this choice entails risks, but these are shared by all central  banks and must be distinguished from the criticisms levelled at the FCFA. Moreover,  as a monetary union, the FCFA is less exposed to the risk of targeted reprisals. For  example, the recent coups d’état in West Africa, while unfavorable to Paris, have  apparently not led to any manipulation of the FCFA. 

The realities of the economic debate

These symbolic debates often overshadow the deeper economic debate surrounding  the FCFA’s fixed parity with the euro, guaranteed by the French Treasury. This provides  the currency with remarkable stability, but it also ties it to a strong currency, which can  lead to overvaluation of the FCFA and thus harm its competitiveness. 

Choosing a fixed exchange rate against the dollar or euro is a common decision in  developing countries. This option has the advantage of reducing the risks associated  with exchange rate fluctuations, which in turn helps to attract foreign investment. For  countries in the franc zone, this stability is reinforced by the guarantee offered by the  French Treasury, constituting the major advantage of the FCFA. Opting for a fixed  exchange rate generally implies constant management of the foreign currency market,  with an associated risk of inflation. The guarantee provided by the FCFA enables franc  zone countries to avoid such practices, and to benefit from the advantages of a fixed  parity without the disadvantages. This exceptional situation makes it a safe-haven  currency for countries in the region. 

The real question lies in the choice of the euro as the reference currency for  maintaining this stability. The euro, as a strong currency, could make the FCFA less  competitive in the event of appreciation, negatively impacting the exports of countries  in the zone. While pegging the FCFA to the FF after colonization seemed logical in  view of France’s commercial preponderance in these regions, this justification is losing  its relevance today, given that neither France nor other European countries are these  countries’ main trading partners today. Nevertheless, there is no logical alternative in  sight. The USA does not enjoy a sufficient presence in trade with these countries to  consider a dollar peg, while other options such as the Chinese renminbi remain too  volatile and little used in international trade to be seriously considered. 

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