West African CFA franc reform: what’s changing in 2020

To date, only the monetary agreement has been finalised. It will replace the 1973 agreement between the eight Union Economique et Monétaire Ouest Africaine (UEMOA) member states and France.

The new agreement was signed on 22 December 2019 by all ministers of finance of the nine governments concerned, but no information is known about its content because the African ministers did not release it to the public.

Prior to the upcoming Economic Community of West African States (ECOWAS) meeting, set to be held in June 2020, there are several steps left in the transition process:

• The monetary agreement, which provides for the Eco to be pegged to the euro with a fixed exchange rate and an unlimited, unconditional guarantee by France, must be ratified by the France’s parliament and UEMOA member states in accordance with their own legal rules.
• The guarantee agreement, to replace the operations account agreement with the French Treasury, will specify the terms under which the guarantee may be triggered, whether in the form of an overdraft or a line of credit. It will consist of an interest rate that could change based on the duration of the overdraft or line of credit. The agreement will be signed by the governor of the Banque Centrale des États de l’Afrique de l’Ouest (BCEAO) and France’s minister of finance.
• The withdrawal of BCEAO reserves from the French Treasury will occur after these two agreements have been finalised. The reserves will be invested by UEMOA member states, at their discretion, with central banks or the Bank for International Settlements, likely in the spring of 2020.
• Representing 50% of member states’ total reserves, they are primarily made up of listed government bonds. Given that they yield less than the 0.75% rate currently paid by the French Treasury, the resulting budgetary imbalance for the BCEAO will need to be taken into account.

Tricky transition period

• The removal of French representatives from the BCEAO’s supervisory bodies should, in theory, occur after the institution’s statutes and the texts governing UEMOA have been updated. However, given that these formalities could postpone the Eco’s introduction until the end of 2020 and that France would like to get rid of the political burden of the CFA franc as quickly as possible, Paris will remove its representatives as soon as UEMOA member states request it to do so.
• Banknote printing and coin minting for the Eco is not expected to take place before the divergent positions of UEMOA and ECOWAS are clarified regarding the fixed or flexible exchange rate of the future common currency as well as its peg to the euro and the French guarantee, which Côte d’Ivoire backs but Nigeria rejects. Nevertheless, a power struggle over the highly symbolic nature of the currency’s name change has been the focus of attention.

The transition from the CFA franc to the Eco is shaping up to be tricky. If markets get anxious about the new currency’s risk of instability, the Eco’s exchange rate could become highly volatile. Monetary turmoil resulting from such market fears would inevitably impact economic growth across West Africa.