CFA franc

In Africa, the Free zone constitutes a monetary space and economic. This whole, formed of State S and territories sometimes very different from/to each other, is resulting from the evolution and the transformations of old the colonial Empire French and of States which were not French colonies like the Guinea Equatoriale. After the accession with independence, the majority of the new States chose to remain in a homogeneous monetary unit, whose institutional framework was renovated and who was structured by a system of common exchange. Their currencies are contrevaleurs with fixed parity with the Euro, whose value is guaranteed by the Treasury French, within the framework of the Traité of Maastricht.

The Free zone

The Free zone gathers fifteen African States and of the territories of the Pacific divided into four groups:

Monetary stowing made it possible these countries to have an exceptionally stable currency for Africa (before attached to the Franc French, maintaining the Euro) by suppressing the temptation of the “board with ticket” the majority of the countries of these zones installed control mechanisms of the exchanges in order to avoid the escapes of currencies.

These currencies (XAF, XOF, KMF and CFP) account for 3% of the money supply of the Euro.

If CFA has from now on a different significance according to the issuing house, it meant between 1945 and 1958 French colonies of Africa , then between 1958 and the decolonization French communities of Africa (including in Algérie, with the the Comoros and Mayotte, until the independence of the first and the replacement of CFA franc by the French franc with Mayotte).

Before 1945 (but especially at the beginning of African colonization or the establishment of French protectorates in other States), CFA could also mean French counters of Africa , or financial community of Africa , and CFA franc was used as currency separated for the private financial institutions and the French administration before becoming the common and legal currency about it (parallel to the other local currencies in the case of protectorates).

History of CFA franc

Created initially in 1939, right before the Second world war, in fact CFA franc officially was born on December 26th, 1945, day when France ratifies the Accords of Bretton Woods and proceeds to its first declaration of parity to the Fonds international currency (the IMF). It then means “frankly French colonies of Africa”.

It is then a question of restoring the French monetary authority in these territories which were isolated from the metropolis during the second world war, and suffered from the rarefaction of the exchanges, and has sometimes to create local emissions supported on other currencies that the French franc (for example the US dollar, even to accept whimsical emissions by the armed troops, or to accept the currency of the occupants, as it was the case for protectorates and French territories in Asia, whereas these territories, and the public and private local financial institutions, must manage their foreign debts at the end of the world war.

The monetary rules of the game are simple: in all the Member States will circulate from now on tickets of name and graphics different but of fixed respective value - the parity. CFA franc or Comorians will thus be worth everywhere and always 2 centimes French - 1 French franc is worth thus 50 CFA francs or Comorians. Initial CFA then indicate the “African financial Community” for the seven States of the West and the “financial Co-operation of central Africa” for the six other countries. CFA franc enjoys “free convertibility constantly” making the exchange possible with this course between all the currencies.

This “free convertibility” becomes a weapon with double edge, because to print CFA franc is equivalent creating French franc. Banque de France will have thus as a task to supervise with more close the monetary policies of the three central banks African and Comorian. This preeminence passes by the commitment of Banque de France to provide where necessary currencies to the three central banks if those exhaust their reserves - it makes some is committed filling the holes. For better exerting its control, Banque de France makes centralize monetary reserves near the French Treasury which thus holds a “account of operation” in the name of each central bank. These account being able to be debtor or credit, they generate movements of interests.

For a long time, the balances always were about balanced, the system did not cost many currencies France, more especially as it intervened only as a last resort. The central banks were initially to encourage the countries involved in debt of the zone to negotiate in priority of the additional terms of payment to their foreign creditors before requiring to profit from the cover of the French monetary umbrella.

In 1958, CFA franc becomes “frank French community of Africa”.

With independences, the first “ideological” criticism of nature crosses the free zone. According to its detractors, the mechanism of CFA franc perennializes relations exceeded between the lately independent countries and the old colonial metropolis. The African States are private of a monetary reality capacity which is a wheel of a real independence. It is this conviction which explains in 1973, the departure of Madagascar and the Mali. However, quickly these two countries are found with serious economic difficulties and the Mali ends up reinstating the system. This experiment, finally, was used to reinforce the cohesion of the Member States, those having seen that monetary freedom could especially be “freedom to go bankrupt”.

Another debate, turned around the consequences of the fluctuations of the French franc, because the value of CFA franc depended a long time on the requirements of the economic relations and financial between France and Germany rather than of the reality and the needs for the countries of member of the free zone. When the French franc was devaluated, all the other great currencies became more expensive, their more expensive products and their debts in dollars increasingly heavier. On the other hand, exports of the country of the free zone became more competitive, but as these exports related to only basic agricultural produce in general (banana, coffee, cotton, wood…) whose request is not elastic, the advantage proved relatively weak, except for France which saw its industrial products acquiring an competitive advantage in the free zone, from where the concept of exclusive domain.

In 1985, the Guinea Equatoriale integrates the system.
In September 1993, “free convertibility” is abolished.

Today, name CFA franc means frankly financial community of Africa for the Member States of the UEMOA, and frankly of the financial co-operation in central Africa for the Member States of CEMAC.

Arguments “for” or “against” the system of CFA franc

convertibility

CFA franc confers on the countries which adopted it, thanks to its strong bond with the euro, an international credibility that do not have many other countries. On the other hand the euro proving to be an extremely strong currency, the countries of free zone CFA suffer from their too overestimated currency, all the opposite what did without before when the French franc knew many devaluations - what besides had also negative sides ( to higher see in the historical part ).

the setting in commum of the reserves

CFA franc while functioning like a common pot of currencies, the zone allows a total balance of the monetary reserves. However, if in fact always the same countries are credit, temptation can prove to be strong, for these countries, to leave the system. Become credible by their membership of the free zone, certain countries like the Gabon and the Cameroun knew to start a diversification of their exchanges and to strengthen their economy, which encouraged France to wonder about opportunity of continuing to deliver its monetary guarantee, but in fact, the same problem arises for the euro.

monetary creation

The boards with tickets being under control of Banque de France, no country is able to create currency beyond its strict needs, which supports a very low inflation of the same order as that of the euro area, to compare with the rates nettements higher their nearby close relations.

the public expenditure

The control of monetary creation has like corollary the obligation to control the public expenditure. The French Treasury agrees of the advances but to in no case it cannot exceed 20% of the budget revenue, country by country. Any skid results immediately in difficult ends of the month for the treasury of the country in question - the delays in the payment of the invoices of the State and in the payment of the wages of the civils servant thus constitute an indicator of solvency of the country of the free zone.

However, when they are private of treasury, these countries have to a certain extent the possibility of being involved in debt outside the free zone, near backers which never would not have authorized of appropriations if they had not had the guarantee that the management of their public finances were not also rigorous.

Operation of the monetary unions of CFA franc

Although the currencies XOF and XAF are indicated commonly by the same name of CFA franc and have (currently) the same value, they are neither interchangeable nor convertible between them. They thus are not a common monetary area but two juxtaposed zones.

Initially francs CFA emitted by the various institutes were freely convertible; it is not any more the case since September 1993.

Maintaining the close cooperative relations with the central banks of the Free zone, the Banque de France takes part, with its African colleagues, with the work of the common institutions of the zone.

This co-operation allows these countries with the fragile economies and the political systems rather often unstable to profit from a stable Monnaie. However, the bond between the courses of CFA franc and the euro do not make it possible the African countries to vary the course of their currency according to the supposed economic aspects to influence it. They thus undergo the economic risks of the Europe and its currency without being able to intervene. These risks however are deadened by the mechanism of the account of operations which makes it possible to vary the quantity of currency in circulation in the zone according to the appreciation (or the depreciation) of the monetary anchor.

With one euro strong, they are handicapped to export their products towards other destinations which Europe but can be essential with lower costs capital equipment except zone:

  • When the euro is appreciated, the quantity of currency compared to SDR increases and the Central banks credit the account with operations near the Trésor French, thus decreasing their reserves and penalizing the mechanism of credit. This mechanism makes it possible to counter the inflationary effect of the strong euro.
  • In the case of the low euro, it is the French Treasury which outputs this account to credit the central banks, more extremely opening the tap of the credit (increase in the quantity of currency).

At the end of 2004, of the protected tickets but also more fragile were put in circulation in zone BEAC and BCEAO, thus replacing the old tickets.

Parity

1 F CFA = 1,70 FF 1 F CFA = 2,00 FF 1 F CFA = 0,02 FRF 1 F CFA = 0,01 FRF
  • Stowing of CFA franc to the Euro: January 1st 1999
1 € = 655,957 F CFA (XAF or XOF)

Convertibility

  • Guaranteed in Euro by the French Treasury

  • Possible in currencies through the foreign exchange market of Paris, with the Euro as standard
  • Freedom of the transfers within each monetary union
  • Suspension measure of repurchase of banknotes CFA coming into effect on August 2nd, 1993. Previously, and this until the 1993, the convertibility of the tickets was free and unlimited with the counters of the bank of France.
  • Suspension measure of repurchase of tickets CFA enters the zone UMOA and zone CEMAC as from September 1993.

See too

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