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Unpacking West Africa’s transition to the Eco
The UEMOA states are throwing off the shackles of French colonialism by adopting a new currency, the Eco. Coordinating this with the wider ECOWAS grouping could prove complicated, however. What happens next?
It’s finally happening. Ivorian President Alassane Ouattara and his French counterpart Emmanuel Macron held a joint press conference on 21 December in Abidjan to announce that the CFA franc would be replaced by the Eco from the middle of 2020. For the transition to be a success it must avoid any mistrust around the new currency.
Conditions appear to be ripe for the initial phase of the Eco’s introduction to go smoothly. Reserves at the Central Bank of West African States’ (BCEAO) are at an appropriate level and Côte d’Ivoire, the powerhouse of the UEMOA, is doing well.
- Between now and the Eco’s likely debut in July 2020, the eight member states of the UEMOA and France will sign a highly symbolic agreement to do away with the operations account agreement with the French Treasury and replace it with a guarantee agreement.
- This agreement will be accompanied by an exchange of letters written in very technical language to organise the transformation of what is effectively an unlimited overdraft provided by France to an unlimited line of credit.
Essentially, nothing will have changed, except – once again for symbolic reasons – to sever ties with the former colonial power of France the BCEAO’s reserves will be transferred to at least one European central bank in the form of securities. The bulk of the UEMOA’s monetary reserves is in euros. Some reserves may also be transferred to the Switzerland-based Bank for International Settlements (BIS).
Flexible or fixed exchange rate?
The CFA franc is pegged to the euro. With the exchange rate remaining unchanged for the time being, Eco banknotes will be issued in such a way that they will gradually replace CFA franc banknotes of the same denomination.
- The new currency will be adopted progressively by different African states as and when they fulfil the convergence criteria, i.e., economic stability, growth, budget deficit, inflation, current account deficit, government debt, etc.
After this stage, things will get difficult. Although it has been planned since June 2019 that the Eco’s exchange rate will be flexible, a minority of countries prefer a fixed exchange rate.
Countries will also be required to deposit all their foreign currency reserves at the BCEAO, but some states, once again, balk at the idea. For France to provide a guarantee, these reserves must be pooled.
What about France’s guarantee to ECOWAS countries?
The biggest obstacle will be the transition from the UEMOA’s Eco to a single currency across the 15 ECOWAS states. This is because seven ECOWAS members are not part of the current CFA franc zone.
- According to one financial market analyst: “Markets could attack the new currency and capital could flow out if there’s the sense that the ECOWAS’ single currency is being adopted too hastily.”
No to Nigeria
As for France, a source close to the negotiations has indicated that the country is willing to keep a guarantee in effect for the Eco currency’s extension to the ECOWAS, provided that Nigeria is excluded.
From a financial market perspective, Nigeria’s inclusion seems to be off the table in the medium term, as the behemoth of a country, with a population of close to 200 million, would destabilise the Eco zone due to its outsize influence and general lack of intra-African cooperation.
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A giant with feet of clay
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Ghana, with a better record of managing its public finances, would be desirable as a member, although the country will think twice before accepting to put its foreign currency reserves in the common pot.
- According to the same source, “the risks are political. The only way for the Eco to succeed is if all heads of state and government get involved. At this time, not all of them are taking ownership of the project. Some feel lukewarm about President Ouattara’s leadership status on the matter. They are wondering how things will turn out if he hands over the Côte d’Ivoire presidency in November 2020 to someone who has less experience in this area.”
A different process for Central Africa
Moreover, what about the CFA franc zone in Central Africa, where the six states of the Economic and Monetary Community of Central Africa (CEMAC) have a separate agreement with France?
“The CEMAC will go through the same gradual process,” the source confirms. “Central Africa has an advantage over West Africa because it doesn’t need to worry about absorbing anything equivalent to ECOWAS or one of its neighbours such as the Democratic Republic of Congo. However, Central Africa is disadvantaged in that its members have a hard time pooling their foreign currency reserves. The same reform will be adopted, but, at the very minimum, its name will be changed.”