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The Eco and the CFA franc: four weddings and a funeral

In depth
This article is part of the dossier: The perilous journey to a West African single currency
Kako Nubukpo
By Kako Nubukpo

Economist, former minister for long-term strategy and public policy evaluation of Togo and former economic and digital director of the International Organisation of La Francophonie

Posted on Thursday, 23 January 2020 09:26

Ivorian President Alassane Ouattara welcoming his French counterpart Emmanuel Macron on Friday 20 December 2019 in Abidjan. © AP/Sipa

Economist Kako Nubukpo believes that “when someone pretends to die, we have to pretend to bury them” and envisions four possible scenarios of how the Eco’s replacement of the CFA franc could play out.

After Côte d’Ivoire’s President Alassane Ouattara announced on 21 December 2019 in Abidjan that the CFA franc is nearing its end and set to be replaced by the Eco, people in Africa’s Franc Zone began buzzing about monetary policy and it is giving rise to every kind of excess imaginable, particularly from those who are just now discovering that the CFA franc currency is not compatible with development in Francophone Africa.

While it is important to keep putting pressure on the CFA franc, it is also essential to propose a potential outline regarding the transition to the replacement currency, the Eco, whose (re)birth was announced on 29 June 2019 in Abuja, Nigeria, by the Summit of the Authority of the Heads of State and Government of ECOWAS.

In this regard, four options, among others, appear to be effective ways to unite the 15 member states invited to the Eco table [1]:

Option 1: The Eco as simple avatar of the CFA franc

This plan, which seems to have been inspired by Ouattara’s announcement in Abidjan on 21 December 2019, is based on meeting nominal convergence criteria and highly favours a fixed exchange rate with the euro. It assumes that the UEMOA will gradually expand to include ECOWAS economies sharing the same agricultural commodities export profile as its members.

Under this option, the pooling of foreign currency reserves is crucial, and it is the principle on which the CFA franc was historically established. The option is predicated on a high amount of political solidarity between member states and this cannot be neglected if the monetary zone were to be expanded.

Likewise, the external guarantee mechanism France provided on the institutional level for the CFA franc has a significant political dimension: it serves as the basis for the system’s stability in theory and in practice.

If we retain the principle of pooling reserves, but redirect their management to a different institutional structure, monetary sovereignty will be transferred over from France to UEMOA and then to ECOWAS.

Parity also needs to be considered: a few years back, important research was conducted on this issue to come up with a flexible exchange rate regime or, better yet, an adjustable exchange rate regime, as the latter is based on an index calculated using a basket of currencies.

Ouattara’s announcement that a fixed exchange rate with the euro would be maintained as a transitional measure is the main stumbling block between those in favour of a flexible currency (ECOWAS) and those in favour of an Eco-CFA (Côte d’Ivoire and Senegal).

Option 2: An Eco based on real convergence: GDP per inhabitant

If this option were to be chosen, ECOWAS economies would have to converge towards the three top-performing countries, i.e., Cabo Verde, Nigeria and Ghana. The Eco would have a flexible exchange rate regime governed by inflation targeting.

Accordingly, the convergence dynamic would be completely different and the UEMOA states would lose their superior reputation for convergence and, along with it, their role as heavyweights in the Eco implementation process.

But is Nigeria – ECOWAS’ true heavy hitter given that it accounts for 70% of the zone’s GDP and 52% of its total population – ready to take on a leading role in the Eco zone? Why would the country accept to be ECOWAS’ lender of last resort, a role it did not want to play when the second West African Monetary Zone (WAMZ) was set up in 2002.

Above all, why would it want to abandon its currency, the naira, at a time when money is being printed to resolve internal tensions within the Nigerian federation?

Option 3: The Eco-naira

This would take us back to the original philosophy behind WAMZ. On 20 April 2000 in Accra, Ghana, six West African countries (Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone) announced that they intended to create a second monetary zone in West Africa which would use the Eco as its currency, alongside the CFA franc of UEMOA.

The project provided for a future merger of the two zones in order to dovetail the borders of the monetary union with those of ECOWAS. In April 2002, WAMZ was established and each country made a commitment to maintain its domestic exchange rate within a fixed range of 15% against the dollar.

After that, no progress was made in terms of introducing the single currency until the ECOWAS summit in Abuja on 29 June 2019.

At that time, it was announced that the Eco would be adopted in 2020 and on 16 January 2020, in response to Ouattara’s Eco announcement, the Council of Ministers of Member States of WAMZ issued a statement accusing the UEMOA states of contravening the intent of the currency.

Option 4: The Eco, a common, but not single, currency

This plan would be a less onerous agreement compared to a single currency agreement. The idea, a first step towards an integration process between countries, was first suggested in 1960 by Senegalese economist Daniel Cabou, who would later become the first secretary general of the Central Bank of West African States (BCEAO).

The suggestion, although resurrected nine years down the road by Egyptian economist Samir Amin in a report for former Nigerien President Hamani Diori, was ultimately discarded.

It could resurface today if countries that are not yet able to join the single currency unite around the idea by entering into exchange rate agreements.

Symmetric correction mechanisms for trade imbalances could help put trade surpluses back into circulation within the ECOWAS zone by encouraging specialisation processes between economies, as they provide a basis for increasing intra-zone trade. Increasing such trade is in turn one of the major political and economic goals of the integration process.

Ultimately, several options are on the table for West African decision-makers. The Eco’s creation process constitutes a true test of the credibility of West Africa’s vision and governance. For France, the process serves instead as a test of its sincerity concerning its willingness to effectively put the CFA franc to rest.

According to a Togolese proverb, “when someone pretends to die, we have to pretend to bury them.”

Let’s organise a funeral for the CFA franc and, when it is put to rest, meaning when the Eco is effectively created, we will celebrate the genuine death of the former franc of the French African colonies official.

If a real Eco is not created, the ‘corpse’ will move, and the fight will resume.

[1] Massimo Amato – Kako Nubukpo, “Una nuova moneta per gli Stati dell’Africa dell’Ovest. Le condizioni teoriche e politiche della sua fattibilità”, to be published in March 2020 in a special edition of Moneta e Credito (“Modelli di sviluppo e aree monetarie: percorsi alternativi e vincoli strutturali”).

This article first appeared in Jeune Afrique

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