Is West Africa’s CFA reform a collateral victim of COVID-19?

By Joël Té-Léssia Assoko
Posted on Wednesday, 6 January 2021 16:05

CFA franc (illustrative image) © Jeune Afrique

While the current crisis with its fair share of uncertainties has impacted the timing of this monetary reform, other factors have also contributed to it.

Published at the beginning of December, the Report on Monetary Policy in the WAMU by the Central Bank of West African States (BCEAO) leaves little doubt about the severity of the macroeconomic situation in the eight countries of the Union.

The state of public accounts has deteriorated

“For the year 2020 as a whole, the latest forecasts place the growth rate of the Union’s GDP at 0.9% against 5.8% in 2019,” writes Governor Tiémoko Koné’s staff, who note that this forecast is also higher than that of the IMF (0.3%).

At the same time, the state of public accounts has deteriorated. “As a matter of fact, the budget deficit amounted to 3,742.1bn CFA francs or 5.5% of GDP at the end of September 2020 compared to 1,576.3bn or 2.4% of GDP a year earlier.”

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

To make matters worse, “for the year 2020 as a whole, the inflation rate is projected at 2.2% in contrast to -0.7% in 2019,” emphasises the BCEAO report.

For its part, the UEMOA Commission expects an upturn in 2021, with growth of 5.9% in the monetary zone, according to its “Semi-annual report on the implementation of multilateral surveillance.” The report notes however that “the debt ratio of the Union in 2020 would stand at 49.3%, up 5.2 points from 2019.”

A “disrupted” schedule

In view of this worrying data, it’s not surprising that the abandoning of the CFA franc – decided back in December 2019 by Presidents Alassane Ouattara and Emmanuel Macron, in favour of the “Eco”, the future common currency of ECOWAS countries – has experienced some delays.

July 2020, unofficially evoked as the month of transition from the CFA franc to the Eco, has passed without any major breakthrough. Should we conclude that this transition, so long awaited, has been torpedoed by the health and economic crisis caused by COVID-19?

READ MORE France: One step closer to ending the CFA franc

Partly. “The transition schedule has indeed been turned upside down by the COVID crisis and our experts are working on a new schedule, but important progress has already been made – both in terms of the name and the common central bank – which will be communicated in due course,” said Adama Coulibaly, the Ivorian Minister of Economy and Finance, in a recent interview with us.

However, even before the outbreak of the pandemic, the reform had suffered a backlash from ECOWAS member countries who didn’t use the CFA franc. These countries accused their neighbours in UEMOA of having appropriated the name of the future common currency.

READ MORE Replacing CFA with Eco ‘challenges the sovereignty’ of Nigerian naira

Intense diplomatic efforts, led by Ghana’s President Nana Akufo-Addo who is seen as the official mediator, over the following months helped to calm tensions between the eight countries of UEMOA and their seven neighbours from the rest of ECOWAS. In September, the Community agreed to postpone the launch of eco to a later, as yet unspecified, date.

Uncertainties and ambiguities

However, several key steps remain pending, independent of the COVID-19 crisis. Among them, the adoption by the UEMOA’s parliaments of the new treaty ratified at the end of 2020 by the Ministers of Economy and Finance.

READ MORE The pros and cons of the CFA franc zone

On 10 December, French MPs approved the new cooperation agreement between Paris and the UEMOA member countries. By contrast, the website of the National Assembly of Côte d’Ivoire, the leading economy of the UEMOA zone, gives no indication of having examined or adopted this text.

Moreover, debates among French MPs have revealed that the introduction of the eco might come later than previously thought. “The timetable is significantly out of step – between 2023 and 2025 according to some, I can’t say,” said French MP Marc Le Fur, spokesperson for the bill, in early September.

“As much as there is uncertainty about the date, there is no uncertainty about consistency: it remains unchanged. The only ambiguity lies in the words used, because the currency must be called eco, which was also the name chosen by ECOWAS for its future common currency. This causes a small difficulty between these countries,” explained the French parliamentarian born in Dakar.

Figures too close to the limits of the “comfort zone”

In addition to the limited visibility on the legislative agenda for this reform in the UEMOA zone, the very criteria of macroeconomic convergence, necessary for the adoption of this currency and especially for its extension to other countries of the ECOWAS, could be revisited.

This is what emerges from the UEMOA Commission’s semi-annual report on the implementation of multilateral surveillance. The Commission feels that the deterioration in the budgetary balances of the Member States should not be reversed immediately. “Forecasts provided by Member States indicate that fiscal consolidation should take place from 2024 onwards,” the Commission says.

As far as inflation is concerned, next year it will be close to the upper limit of the Central Bank’s “comfort zone” (1% to 3%), and is not expected to fall below 2% until the end of 2022, with a rate of 1.8% expected by the end of that September.

The average debt ratio of Member Countries remains below the limit of 70% of GDP set in the macroeconomic convergence criteria. However, it has risen sharply over the space of a year, rising “from 44.1% in 2019 to 49.3% in 2020.” It is expected this year to reach fairly high levels in Guinea-Bissau (63.3%), Senegal (64.6%) and Togo (57.8%), according to the Commission.

Towards the adoption of a new “convergence pact”?

The regional institution has also played a difficult balancing act with regards to the evolution of convergence criteria in the zone. On the one hand, it welcomed “the favourable macroeconomic prospects in all the Member States, based, in particular, on the assumption that the health crisis will be under control from 2021 onwards.”

READ MORE Anglophone West Africa kicks back at use of Eco to replace CFA franc

On the other hand, it called on the Member States, in view of the impact of the crisis, to “take the necessary steps to adopt a new convergence pact, capable of guaranteeing macroeconomic stability in the medium term.”

This address was delivered without further details, but it hinted at a new period of uncertainty regarding the timing of the transition to the eco.

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