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Devaluation Jitters Grip CFA Franc Zone 

By Jay Wamey

Cameroonians and citizens of other African countries that use the Franc CFA have been paralyzed for weeks by the fear of another devaluation of the currency carried in various press reports. Cameroonians remember with bitterness the havoc wrought on their livelihoods by the last devaluation in 1994, especially as it came along with a drastic cut in public service salaries.

The result was rampant inflation in the prices of both domestic and imported goods. It also served as an excuse for price gouging by merchants, and even the cost of bribery increased for the most basic services. According to Reuters and other press reports from Yaounde, Cameroon’s finance minister and Central Africa’s top central banker both said last week that there would be no devaluation of the CFA franc currency used by 14 states in Africa, denying market rumors. 

The CFA franc is currently tied to the euro at a fixed exchange rate of one euro to 655.957 CFA francs, with the peg guaranteed by the French treasury. It was last devalued in 1994 — at that time versus the French franc — to allow the heavily indebted countries to export more. "As I am talking to you now, I, as minister of finance, I don’t know where this rumor started. I only learnt about it on the Internet," Essimi Menye told reporters in the Cameroonian capital Yaounde.

"How come the CFA franc will be devalued and I, Minister of Finance of Cameroon, am not aware? I can assure you there will be no such thing. Our economies are doing very well. And nobody can impose it (a devaluation)," he said. But a widely circulated article by Dr Gary K. Busch, an international trade unionist, academic, businessman and political affairs consultant, the CFA franc will be devalued on 1 January 2012, citing what he calls several reliable sources in West Africa.  

Busch says the responsibility for this approaching disaster is the failure of the French economy to deal with its long-term structural debt and the use of French reserves to prop up the failing Euro and participate in the several bailouts within the Eurozone. French wars in the Ivory Coast and especially Libya have cut a major hole in the French pocket. Their tame African partners, the presidents of francophone African states, are complicit in this plan for devaluation and continue to follow the lead of their protectors, the French Army, in whatever they suggest.
Busch says this relationship is long-standing and a paradigm of neo-colonial enterprise. 

The regional BEAC central bank expects the Central African zone of mainly oil-producing countries to register an average of just under five percent economic growth this year. Ivory Coast, the main member of the West African CFA zone, is bouncing back after this year’s post-electoral conflict brought its economy to a halt. Menye insists that the overall economic situation of the CFA franc zone countries was different from that in 1994 because then all the countries were poor and heavily indebted, with little or no investment coming in.

While many analysts believe CFA zone countries would ultimately benefit from devaluation because it would make their exports more competitive, many inside the zone fear the impact of more expensive food and fuel imports. The governor of the Bank of Central African States (BEAC) also told reporters that there should be no fear of devaluation due to the crisis in the euro zone. Speaking from the Yaounde headquarters of the BEAC, Lucas Ababa Chama said the economic indicators that pointed to the 1994 devaluation were not the same today.

"When the CFA franc was devalued in 1994, a number of indicators were observed, our foreign currency reserve ratio was in the negative. We are required to have at least 20 percent of reserves, but today we are covered at 100 percent," he said. "Our current account is positive compared with the situation during the devaluation, so you can understand that looking at these indicators, there is no reason to talk about a potential devaluation of our currency," Nchama told Reuters.

France’s Influence on Devaluation 
But according to Abdoulaye Villard Sanogo, a Senegalese analyst writing in Notre Voie, French president Nicolas Sarkozy has charged Ivory Coast President Alassane Dramane Ouatara with bringing the news to his peers of the WEAMU (West African Economic and Monetary Union); which explains Ouattara’s last week’s grand West African tour.

Sanogo says Congolese president Denis Sassou Nguesso was also charged with the task of informing his peers of the Monetary and Economic Community of Central Africa (CEMAC) as well as the Comoros Islands,”  adding that Sarkozy has taken upon himself to personally notify susceptible Senegalese president Abdoulaye Wade, who is presently facing social and political discontent at home.

Wade is expected to later inform his peer of tiny Guinea-Bissau. Sanogo cites European diplomats who say the decision to devalue the CFA is a consequence of the crisis in the Euro-Zone, which has for the most part been borne by Germany. German Chancellor Angela Merkel has stressed to Sarkozy the importance of putting some budgetary order in France’s ex-colonies before it is too late, he says.

However, it is clear that this measure is less intended to shelter the economies of the CFA-Zone than to save the Euro-Zone by preventing a further crash of France’s economy, as the burden of saving the euro becomes too much for Germany to bear. How would CFA devaluation really help France? Sanogo says France’s gain from the devaluation would be enormous in financial and budgetary terms. In a trenchant analysis appearing in the online ThinkAfrica Press, Gary Busch largely agrees with the broad outlines of Sanogo’s argument and we publish that part of his paper in full below.

What is the CFA Franc?
There are two separate CFA francs in circulation. The first is that of the West African Economic and Monetary Union (WAEMU), which comprises eight countries (Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo). The second is that of the Central African Economic and Monetary Community (CEMAC), which comprises six countries (Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea and Gabon). This division corresponds to the pre-colonial French West Africa (AOF) and French Equatorial Africa (AEF), with the exception of Guinea-Bissau, formerly a Portuguese colony, and Equatorial Guinea, formerly Spanish.

Each of these two groups issues its own CFA franc. The WAEMU CFA franc is issued by the Central Bank of West African States (BCEAO) and the CEMAC CFA franc is issued by the Bank of Central African States (BEAC). Since 1994, both currencies were pegged at 100 CFA to the French franc but, after France joined the Euro at a fixed rate of 6.65957 French francs to one Euro, the CFA rate to the Euro was fixed at CFA 665.957 to the Euro. The current plan is to peg the rate at CFA 1,000 to 1 Euro – a devaluation of about 35%.

Who is responsible for the CFA Franc?
The monetary policy governing such a diverse aggregation of countries is uncomplicated because it is, in fact, operated by the French Treasury, without reference to the central fiscal authorities of any of the WAEMU or the CEMAC states. Under the terms of the agreement which set up these banks and the CFA, the Central Bank of each African country is obliged to keep at least 65% of its foreign exchange reserves in an “operations account” held at the French Treasury, as well as another 20% to cover financial liabilities.

The CFA central banks also impose a cap on credit extended to each member country equivalent to 20% of that country’s public revenue in the preceding year. Even though the BEAC and the BCEAO have an overdraft facility with the French Treasury, the drawdowns on those overdraft facilities are subject to the consent of the French Treasury. The final say is that of the French Treasury which has invested the foreign reserves of the African countries in its own name on the Paris Bourse.

In short, more than 85% of the foreign reserves of these African countries are deposited in the “operations accounts” controlled by the French Treasury. The two CFA banks are African in name, but have no monetary policies of their own. The countries themselves do not know, nor are they told, how much of the pool of foreign reserves held by the French Treasury belongs to them as a group or individually.

The earnings of the investment of these funds in the French Treasury pool are supposed to be added to the pool but no accounting is given to either the banks or the countries of the details of any such changes. The limited group of high officials in the French Treasury who know the amounts in the “operations accounts”, where these funds are invested and whether there is a profit on these investments are prohibited from disclosing any of this information to the CFA banks or the central banks of the African states.

This makes it impossible for African members to regulate their own monetary policies.
Three basic mechanisms have traditionally been used to control monetary growth in the CFA Franc Zone by the two banks operating under the instructions of the French Treasury:
•        In the central banks’ operations accounts, interest is charged on overdrafts, and conversely, interest is paid on credit balances.

•         When the balance in a central bank’s operations account falls below an agreed target level, it is required to restrict credit expansion, generally by increasing the cost to member countries of rediscounting paper with the central bank or by restricting member-countries’ access to rediscounting facilities.
•        Credit provided by the central banks to the government sector of each of their member countries can be no larger than 20% of its fiscal revenue in the previous year.

However, this tight control by France of the cash and reserves of the francophone African states is only one aspect of the problem. The creation and maintenance of the French domination of the francophone African economies is the product of a long period of French colonialism and learned dependence by African states.

For most of francophone Africa, central banks are given limited power. These are economies whose vulnerability to an increasingly globalised economy is increasing daily. There can be no trade policy without reference to currency; there can be no investment without reference to reserves. The politicians and parties elected to promote growth, reform, changes in trade and fiscal policies are made irrelevant except with the consent of the French Treasury which rations their funds.

There are many who object to the continuation of this system. President Abdoulaye Wade of Senegal has stated very clearly: “The African people’s money stacked in France must be returned to Africa in order to benefit the economies of the BCEAO member states. One cannot have billions and billions placed on foreign stock markets and at the same time say that one is poor, and then go beg for money.”

Why devalue the CFA Franc?
France has run out of money. It has massive public and bank debt. It has the largest exposure to both Greek and Italian debt (among others) and has embarked upon yet another austerity plan. Its credit rating is on the brink of losing its AAA status and the private banks are going to have to take a major haircut on its intra-European debts. Part of the reason it has been able to sustain itself so far is because it has had the cushion of the cash deposited with the French Treasury by the African states since 1960. Much of this is held in both stocks in the name of the French Treasury and in bonds which have offset and collateralized a substantial amount of French gilts.

The francophone African states have gradually been able to recognize that they may never see their accumulated assets again as these have been pledged by the French Treasury against the French contribution to the several European bailouts. Wade of Senegal has again been asking for accounting. None has been forthcoming.

Ouattara of the Ivory Coast and Denis Sassou-Nguesso of the Republic of Congo have been told that it will be necessary to devalue the CFA francs and they have been delegated the role of informing their African presidential colleagues. Devaluation will release funds and extend a lifeline to the French Treasury, which may be called upon to bail out French banks exposed to the European debt crisis.

However, it will have a devastating effect on Africa. The last time there was such a devaluation most of French Africa suffered badly (except for the Presidents and their friends). Devaluation is useful if you have things to export which are made relatively cheaper. However, for most of francophone Africa the goods they have for export are raw materials and petroleum. Much of their manufactured goods, their services, their invisibles come from or through France. |Large amounts of food is imported from outside Africa and is growing daily in price as is transport.

There were signs of price inflation earlier this year. West African monetary zone inflation accelerated to 4.1 per cent in January from 3.9 per cent the month before.  Inflation in the eight-nation economic zone, which uses the euro-pegged West African CFA franc, was mainly due to rising food, transport, housing and communication costs. Price-growth averaged 1.4 per cent in 2010, up from 0.4 per cent the previous year. Higher prices for petrol and food drove that increase.

One of the countries which was hardest hit by the previous devaluation was the Ivory Coast. That devaluation entailed the signature between the IMF and the World Bank for an Enhanced Structural Adjustment Facility (ESAF) (1994-1996), that imposed drastic measures on the government to make  budgetary restrictions destined to straighten up the national economy – this, to no avail.

Furthermore, the “raining billions” (an exceptional, unprecedented volume of credits) encouraged bad governance in the country. The man then in charge was Deputy Managing Director of the IMF and now Ivorian president, Alassane Ouattara. He has been accused of being at the heart of deterring international financing whilst letting the Ivorians sink deeper and deeper into poverty.

It was the carrying out of projects financed by the European Union, and the massive deterring of credits linked to postponing debt contracted on behalf of international institutions, that brought these same institutions to break off with the Ivory Coast in 1998. The country then sank into a depression and the growth rate reached a record low. In the year 2000, the figure was negative for the first time in the country’s history: -2.3%.

The price African states will pay for devaluation will be poverty, stagnation and increased unemployment. This unemployment and underemployment will place a crucial role in domestic stability and growth. While it is easy to see that people without jobs and hope are more willing to take more extreme positions, the economic consequences are also clear. In economics, Okun’s law refers to an empirically observed relationship relating unemployment to losses in a country’s production first quantified by Arthur M. Okun.

This ‘law’ states that for every 1% increase in the unemployment rate, a country’s GDP will be at an additional roughly 2% lower than its potential GDP. Fragile African economies will find it hard to develop policies to compensate for these losses. Although the problem is most acute in the Ivory Coast, which represented at the last devaluation 60% of the assets of the West African Pool, it is no less serious for the other states.

Despite this, and the poverty it will bring to the region, there are few African presidents who are willing to renounce the Pacte Coloniale and end the terrible toll of French neo-colonialism in the region. France may have overspent its funds and bitten off more than it could chew in European debt and now foreign interventions. Surely it isn’t the job of West Africans to pay for this aberrant behavior.
 

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