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Date: 29 July 2020

The end of the CFA Franc? The debate continues…

The end of the CFA Franc? The debate continues…

Late last year, Ivorian President Alassane Ouattara and his French counterpart Emmanuel Macron jointly announced plans for the West African CFA Franc (the “XOF”) to be replaced by a new regional currency, the “Eco”, from mid-2020, reversing the decades-long currency regime in West Africa.

The XOF is pegged to the EUR at 1 EUR to 655.957 CFA Francs. The critical tenant of the currency is that the French Treasury guarantees convertibility at this fixed-rate, in exchange for UEMOA-member countries depositing 50% of their respective reserves with the French Treasury.

The timing of the December announcement was viewed with some surprise, though analysts have viewed the conditions in terms of adequate economic performance amongst major economies and stable reserve levels at the BCEAO as optimal to progress an initial transition phase. The key changes will, in fact, be minimal, at least at first, those being: (i) the name change to “Eco”, (ii) removal of the obligation to hold 50% of reserves at the French Treasury and (iii) France’s withdrawal of its representative from the decision-making bodies of the BCEAO (regional Central Bank).

Several constructs will likely not change in practice as confirmed in a draft bill in May of this year by the French Council of Ministers. The BCEAO will likely keep significant reserves at the French Treasury after all given the comparatively high deposit rates vs elsewhere and that France will remain a guarantor of convertibility between the XOF/Eco and Euro. Thus, the French Treasury will retain its influence. As such, it is consensus that the peg will remain for the foreseeable future.

Even these relatively limited changes in the currency regime have stumbled early in 2020. A key roadblock has been fact that the December announcement to use the Eco effectively “hijacked” a June 2019 adoption by the fifteen ECOWAS Member states of a single currency project of the same name, with plans to introduce that new currency also in 2020. Political animosity was stoked with these other countries. For example, last month, Nigerian President Muhammadu Buhari spoke of the lack of “trust” exhibited UMEOA members by breaking with the ECOWAS plan.

As it stands, there remains uncertainty on the coordination with the wider ECOWAS currency project, given the lingering political feud. Furthermore, most non-UEMOA ECOWAS members (i.e. the Anglophone countries) do not want to forsake their monetary independence and trade competitiveness and adopt a de facto peg to the Euro.

These developments all point to more debate in the short-term rather than significant changes to the currency regime in West Africa.

Sources: The Africa Report

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