Event

At the end of December 2019, Ivorian President Ouattara and French President Macron officially announced the creation of the eco as the future new regional currency replacing and reforming the CFA franc. The eight CFA countries of the West African Economic and Monetary Union (WAEMU: Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo) signed the agreement. They will be the first members of the new regional monetary union. In a second phase, the non-CFA members of the Economic Community of West African States (ECOWAS: Cabo Verde, Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone) would join as well once they meet predefined economic criteria (related to fiscal deficit, foreign exchange reserves, inflation, etc.). Ghana could already join in the first stage. Thus, in total, the 15 ECOWAS countries are expected to use the eco. The participation of Nigeria has yet to be officially confirmed. As for the CEMAC (which has a separate Central Bank), its mostly oil-dependent members (Cameroon, Chad, Central African Republic, Congo Republic, Equatorial Guinea and Gabon) might also choose to break the monetary link with France in the medium/long term. 

While the planning of the eco introduction, which will occur gradually, is not yet firmly established, the eco is expected to be introduced during the second half of this year, probably before Côte d’Ivoire’s October elections. In addition to the change of name, the currency reform provides for two other changes. 50% of the BCEAO’s (Central Bank of West African States) foreign exchange reserves will no longer be deposited at the French Treasury, and France will no longer have a representative on the BCEAO’s board of directors. However, the peg to the euro will be maintained in the short term. In the end, the BCEAO – whose central policy goal will be inflation control – will have full monetary independence. 

Impact

The CFA franc, set up in 1945, has been increasingly criticised as a lingering post-colonial heritage. The latest announcement is seen as an extra step towards further completion of decolonisation and towards monetary sovereignty. Although it remains to be seen whether practical issues around the eco launch will be overcome this year, the upcoming eco era will have several consequences, present challenges and leave some questions unanswered. Symbolically, sooner or later, the end of the CFA franc was just a matter of time. The recent acceleration of the move from theory to practice has been triggered by the anti-French wave that spread across CFA countries including vocal calls from some West African leaders. Still, despite the announced changes, France will remain involved in the transition period as it committed to maintaining the unlimited convertibility guarantee to the euro and to providing euros to the BCEAO in a crisis situation. In the medium term, however, it is inevitable that this key aspect of the CFA franc system will be removed. After an undetermined transition period of stability aimed at reassuring investors and preventing capital outflows, the eco will become more flexible, see the peg to the euro dropped and potentially be replaced by a peg to a basket of the eco members’ main trade partners’ currencies. The future exchange rate system has yet to be agreed on between the future members.

The consequences in terms of country risks are hard to assess at this stage not least as long as the final structure of the currency reform is not decided. The move to the eco will provide costs and benefits. Regardless of the symbolic aspects of the CFA franc, membership to this economic and monetary zone has brought financial stability (e.g. low inflation and interest rates) and improved external liquidity, thereby supporting international trade and facilitating Eurobonds issuance. Over the past years, it has certainly contributed to stronger average GDP growth within the WAEMU compared with the rest of Sub-Saharan Africa. The likely future removal of the unlimited convertibility guarantee of the eco to the euro will cancel a major mitigating factor of transfer risk for the current CFA countries and will bring new challenges. Political stability, good governance and macroeconomic stability will be further scrutinised by investors and could lead to more currency volatility. Although economic convergence has improved between WAEMU members, the new regional monetary zone will be more heterogeneous by including oil importers and exporters, small economies (Gambia, Guinea-Bissau, Togo), the largest African economy (Nigeria), very poor countries (Liberia, Sierra Leone), countries hit by conflicts (Mali, Burkina Faso, Niger), successful economies (Côte d’Ivoire, Senegal) and successful economies with a history of high currency volatility (Ghana). Therefore, the required macroeconomic convergence between all ECOWAS countries promises to be very challenging as no country met all the convergence criteria in 2018, and this will certainly cause the eco to be postponed in several countries. 

In the short term, the eco is likely to be stable. Nevertheless, if the peg to the euro is dropped, managing the eco volatility when the eco zone integrates more country members will be costly for the region in terms of foreign exchange reserves. Another issue (similar to the Eurozone experience) relates to Nigeria’s dominance within the monetary zone, should it adopt the eco. Its disproportionate economic weight (about 2/3 of the regional GDP) will translate into a biased monetary policy potentially harming many economies that are not synchronised with it. Besides, the non-CFA countries of the new regional monetary union will have to give up the sovereign monetary tool and compensate with domestic fiscal measures when they are hit by an external shock as the  system of the eco will provide no fiscal solidarity mechanism. 

Alongside the perceived economic and transfer risks, the eco will bring benefits such as lower transaction costs and heightened competitiveness for regional exports which could further boost economic development. The psychological dimension matters as well. In spite of potential instability risks, the fact that West Africa is likely to eventually have full monetary dependence and countries will participate to a common African and regional project could raise people and investors’ confidence, and also improve cooperation. As a result, it could help improve economic convergence and expand intraregional trade from its very low level within ECOWAS (i.e. barely 10% of the total). To this end and to make the eco more than an end in itself, it will be essential that infrastructures are further developed, economic diversification promoted and red tape reduced.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com