CFA Franc for Dummies
You may not be aware of this, but in much of Francophone Africa, since last year there’s been a polarizing debate on currency. It has triggered protests, arrests, and even high-level layoffs. What is it that’s causing taxi drivers, economists, and even presidents to weight on this issue?
It’s the CFA franc. Precisely, stakeholders are debating on whether the countries that utilize the currency, should abort it for another one. Tensions are strong and rightfully so, because there is a lot at stake, over 70 years of history.
The motive for this article
In conversations with my friends who aren’t from Francophone Africa, apparently most of them aren’t aware of this issue that’s making headlines. Some of them don’t even know what the CFA currency is and its history. The purpose of this article isn’t to argue in favor or against the currency — it’s not my place to do so.
Some of my friends’ unawareness about the vigorous CFA discussion is the impulse for this piece. Also, most of the pertinent discussion about the topic is in the French language, reducing the size of the audience. Finally, the CFA zone is 172 million people and a GDP of nearly $200 billion. In all, I want to inform about the CFA to people who don’t speak French, so they can fundamentally understand what the currency is and formulate their own opinion about the debate. After all, knowledge is power right?
So, what’s the CFA?
The CFA franc (CFA for short) is a currency that’s used in 14 African countries, 12 of which were former French colonies. These countries are in West Africa and Central Africa. In the West, they are: Togo, Senegal, Côte d’Ivoire, Benin, Burkina Faso, Mali, Niger, and Guinea-Bissau. In Central Africa the following countries use it: Gabon, Cameroon, Congo, Equatorial Guinea, Central African Republic, and Chad. These countries have a combined population of about 172 million and a GDP of $192 billion.
The two geographical clusters also represent economic zones. In the West, there’s the West African Economic and Monetary Union (WAEMU) and in the central region, the Central African Economic and Monetary Union (CAEMC). They also have their respective regional central banks: Central Bank of West African States (BCEAO) and Bank of Central African States (BEAC).
The CFA currency was established just after World War II
It was officially created on December 26th, 1945 by the French government¹. At the time, it was called franc des Colonies Françaises d’Afrique, which in English means franc of French Colonies of Africa. One CFA franc equaled 1.70 French franc² (which was the currency used in France).
Since the 1960s after former French colonies gained their independence, the acronym denotes franc de la Communauté Financière d’Afrique (franc of African Financial Community) for members of WAEMU and Coopération Financière en Afrique Centrale (Financial Cooperation in Central Africa) for members of CAEMC.
When France adopted the Euro on January 1st, 1999, the CFA pegged to the Euro. As of the publishing date of this article, one Euro is worth 656.22 CFA franc.
What’s the monetary policy of the CFA?
Although the two economic zones have their own central banks, due to past monetary policy agreements, they work closely with the Banque de France which is the central bank of France. In fact, the headquarters of the two central banks were in Paris until the late 1970s when they were relocated to Senegal and Cameroon³. The currency is pegged to the Euro and the French monetary institution guarantees an unlimited convertibility between the CFA and the Euro.
But how does France guarantee this parity?
You didn’t think France is promising to convert an unlimited amount of CFA to the Euro for free, did you? Of course not, because it wouldn’t be consistent with monetary economics theory.
According to the policies, CFA zone countries must deposit 50% of their foreign exchange reserves in an account at the French treasury⁴. Why? These foreign reserves are essentially the underlying asset that enables the CFA to convert to Euro, much like how some currencies are still backed by gold.
Here is a simple example of how this works. If Gabon, a CAEMC member, gains $2 billion in foreign exchange from oil exports in a given year, it must deposit half of that amount in an account at the French treasury. The 2017 report of the French central bank on the franc zone contains some interesting financial ratios and statistics⁵.
Interesting facts
The CFA paper bills and coins are not printed by the treasury departments in the central banks of the CFA zones. The mint and printing facilities are housed in France.
Although the French central bank guarantees the convertibility of the CFA to Euro, the two currencies in the CFA zones are not convertible. For example, a Togolese tradeswoman cannot use the CFA that she travels with in Cameroon. In fact, she cannot directly exchange it into the CAEMC CFA. She would first have to exchange her money to Euros, then to the CAEMC CFA.
What should you do now?
Now that you have a fundamental understanding of the CFA currency, as an exemplary global citizen, conduct some research about the currency debate and frame your own opinion on whether the countries in the two economic zones should drop the CFA or maintain it.
If you’re an African- even if your country doesn’t use the currency- the decision by the powers that be, to remain or leave should concern you, because it would have an impact on your country’s economy, especially if it shares borders with any country in the CFA community.
