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.