Africa's single currency, the CFA Franc, in a Post-euro Future

Born only thirteen years ago, there are credible concerns that the euro won’t make it through adolescence. Just last week, the currency hit a sixteen-month low against the dollar while Standard and Poor’s downgraded the credit ratings of nine eurozone countries including France. In contrast, France’s former colonies in western and central Africa have developed a common currency that works. Indeed, the CFA franc has survived for more than sixty years.

The question now is, what will happen to the CFA zone as the euro crisis deepens?

Fourteen countries use one of two euro-pegged CFA (commonly pronounced “say-fah”) francs as their legal tender. Comprised of eight agrarian West African nations and six resource-rich central African countries, the combined monetary zone stretches from Senegal on Africa’s western coast to the Central African Republic (CAR) at the heart of the continent.

Like the European Union (EU), the CFA zone is economically, politically, and culturally diverse. It encompasses 123 million people, hundreds of languages, and a patchwork of ethnic groups. These countries also have by no means escaped the political tumult that has plagued so much of Africa. CAR alone has been hit with nine coups since it gained independence in 1960. And yet, the region’s essential monetary infrastructure remains.

Some might credit the legacy of French colonial rule for keeping the CFA together, given Paris’s backing of the currency and guaranteeing of the euro exchange rate. This peg undoubtedly garners benefits for the CFA (e.g., lower transaction costs in trading with EU countries), but its fate is not intrinsically tied to the euro.

If the euro collapses, the CFA zone wouldn’t tie itself to a resurrected French franc but likely peg to a basket of currencies. Low-growth Europe is no longer the prominent destination for CFA goods, rendering the euro peg less and less important. In 1995, approximately 49 percent of exports from the central African CFA countries were bound for Europe. By 2010, that number had dropped to an estimated 32 percent.

China’s rise as an export destination is most responsible for the turn away from Europe. It has an insatiable demand for natural resources, which makes African countries attractive trading partners. The growing strength of the Chinese renmimbi against the euro hasn’t hurt either.

A euro collapse and subsequent devaluation of the CFA could in fact boost the zone’s long-term competitiveness. When the CFA was devalued by 50 percent in 1994, an International Monetary Fund study found that the zone “experienced strong economic expansion, a more balanced macroeconomic performance, and progress in transforming the structure of their economies.” (Ironically, devaluation against the euro is precisely the policy that might help countries like Greece and Italy today, but they are politically bound to their fixed exchange rate.)

This is not to say de-pegging and devaluation would be all gain and no loss. Without the backing of the French Treasury, including the mandatory reserve balances, the CFA zone would no longer have the immediate credibility and resources that keep international investors relatively at ease with investments in a highly-indebted poor country region. But the euro’s continued fall against the dollar signals that investors seem to be losing confidence in the euro itself.

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