The Beginning of the End for Africa's Last Colonial Currency?

The Developmental Implications of the CFA Franc

After a nerve-wracking delay to the election, Senegal at last appears to have a new president-elect: Bassirou Diomaye Faye, the 44-year old opposition candidate.

Faye’s victory is welcome news for Senegalese democracy, which under the incumbent Macky Sall appeared at serious risk of backsliding. (We may want to postpone celebrations, though, until Faye is safely seated.) Faye is an intriguing candidate. Now the youngest elected president in Africa, he has vowed to govern with “humility and transparency”—starting with renegotiations of Senegal’s new foreign oil and gas contracts.

But perhaps the most intriguing part of Faye’s program is his popular call to reform the CFA franc.

The CFA franc zone is likely the most important developing country institution you’ve never heard of. Its fourteen countries, all in sub-Saharan Africa, peg their currencies to France’s—once the French franc, now the Euro—making it the second-largest currency union in the world. (More precisely, it is two currency unions—eight countries in West Africa, six in Central Africa—but their exchange rate is the same.) Over 160 million people live in countries that use the CFA franc, with a total GDP of about $283 billion. All but two countries, Guinea-Bissau and Equatorial Guinea, are former French colonies.

That both Faye’s platform and his opponent’s included reform of the CFA highlights its growing unpopularity—and the growing potential for meaningful change, which may even extend to dissolution. This raises the question: what have the implications of the CFA franc been for development?

Fixed or Floating?

The heart of the CFA franc is the fixed exchange rate: France guarantees that CFA francs can be freely exchanged at the set rate of 655.957 francs to the Euro. Pegged currencies often have short life expectancies, but the CFA franc has proved unusually stable, thanks to the backing of the French treasury. Outside of a single devaluation—in 1994, by 50%—both the West African and Central African CFA francs have tracked the French franc and the Euro almost one-to-one:

Log-changes in nominal effective exchange rates (NEER), West and Central African CFA vs. France. Data from Darvas (2021)

While other stipulations of the CFA zone have attracted controversy—most notably, the requirement until recently that the West and Central African central banks deposit their foreign reserves in the French Treasury—the fixed exchange rate is by far the most macroeconomically consequential part of the CFA regime.

In mainstream economic theory, fixing your exchange rate can have two major benefits over floating:

• Fixed exchange rates promote growth in an optimal currency area. Trade and capital flow more easily between countries when you don’t have to worry about fluctuating exchange rates, so fixed exchange rates are good for growth.

• Fixed exchange rates constrain the central bank, preventing inflation. Fixing your currency to a foreign one ties the hands of the central bank, which has to keep local monetary policy in step or lose the currency peg. (In the case of CFA Franc, individual countries no longer even have central banks.) Reckless, inflationary money-printing becomes impossible.

But each of these advantages also has a dark mirror:

• Fixed exchange rates promote growth… under certain conditions. If economic conditions between countries are not similar, there may be no positive growth effect. The exchange rate may even be fixed at an inappropriate level that is detrimental for growth.

• Fixed exchange rates tie the central bank’s hands… preventing responses to local shocks. Tying one’s hands to prevent reckless behavior is good, until you need those hands in an emergency. Central banks who peg their exchange rates to foreign currencies cannot use monetary policy to respond to local shocks. Growth may suffer.

Which of these conditions are likely to hold? To understand the full effects of the CFA franc, we can tackle each of them in turn.

Suboptimal Currency Areas

Economists since the Nobel Laureate Robert Mundell have thought long and hard about what constitutes an “optimum currency area”—the conditions for a shared currency like the CFA franc to make economic sense.

In a seminal article from 1961, Mundell laid out four criteria for a successful currency union: common business cycles, labor mobility, capital mobility, and a fiscal transfer mechanism. The intuition is straightforward: if the exchange rate is bound across multiple countries, economic conditions need to be relatively similar for it to be appropriate for everyone. If not, then another policy instrument like fiscal transfers needs to compensate, or people need the freedom to adjust on their own, either by moving their bodies or their capital.

It is self-evident that the first condition, relatively similar economic cycles, does not hold. GDP per capita in the CFA zone is less than $1,500 per year. The CFA countries, particularly in the Sahel, are among the poorest in the world, with subsistence farming and herding livestock among the primary occupations. The price of their currency is set by a country on another continent, where incomes are 30 to 40 times higher. Mundell’s conditions were discussed endlessly during the 2010 Euro crisis, when the question was if Greece met the conditions for an optimal currency area with Germany. Whatever the arguments for union were then, they must surely be less tenable when considering the gulf between Germany and Burkina Faso.

The three remaining elements are labor mobility, free capital flows, and a system of fiscal transfers to buffer against shocks. While there is free movement within much of West Africa, migration from Africa to Europe remains a deeply contentious political issue, and there is no prospect of that changing in the near future. Nor do the meager transfers of Agence Française de Development count as anything close to a fiscal union. The CFA zone thus meets just one of Mundell’s conditions, capital mobility.

The proof is in the pudding. French colonies have fallen far behind their former British counterparts in real GDP per capita (below). Over fifty years of integration, the CFA’s trade with France has actually collapsed, from over 25% in the mid-1990s to just 5% today. More than that, CFA countries hardly even trade with each other—intra-regional trade is only 9% of their total trade. By any measure, if the goal was growth through economic integration, the CFA zone is a dismal failure.

From Bergh and Fink (2018): The French Curse? On the Puzzling Economic Consequences of French Colonization

Free Hands Can Be Useful in a Fire

Far more often than trade, the most common argument you’ll hear in favor of the CFA is that it has helped countries put a lid on inflation. By tying the hands of their central banks and preventing reckless money-printing, the argument goes, the CFA countries have avoided a common scourge of developing economies.

And indeed, on this metric, CFA countries look pretty good. No CFA country has ever suffered a hyperinflation. Compared to their peers, CFA countries have also weathered the recent global inflationary shock relatively well:

Source: Olivier Walther on X

But keeping inflation low cannot be the only goal of a central bank. Inflation must be traded off with growth. If it wanted, the Federal Reserve could raise interest rates to 15% and get inflation close to 0%. The problem is that doing so would take down the US economy.

Also, avoiding unnecessary recessions is one thing in the United States, with a GDP per capita north of $80,000. It is another thing entirely in countries with GDP per capita less than $1,500, who have struggled for decades to initiate the kind of meaningful economic transformation that could end extreme poverty.

How can we think more systematically through the growth-inflation tradeoff? In a 1991 paper for the World Bank, Shantayanan Devarajan and Dani Rodrik examine the tradeoff between monetary stability and lack of policy autonomy within the CFA franc system.

Rodrik and Devarajan tackle the question from an interesting angle: take the inflation and GDP numbers of the CFA countries as given, assume that their decision-making is optimal, and work backwards to figure out what policymakers’ preferences must be. For these poor, mostly rural countries, a tradeoff of 10 percentage points of higher inflation for 1 percentage point in higher real GDP growth seems reasonable. (Remember that going from 2% GDP growth to 3% means incomes double 12 years sooner.)

But, under standard assumptions about the sensitivity of output to the real exchange rate and terms of trade, CFA franc countries seemed to be trading 1 percentage point of GDP growth for just 1 percentage point of inflation reduction.¹ In the most egregious case, Gabon was losing 1 percentage point of GDP growth to shave just half a percentage point off inflation. 

Either leaders of CFA countries have deeply weird preferences about inflation and growth, or the overarching policy regime is not rational. Devarajan and Rodrik conclude:

… our highly stylized calculations suggest that fixed exchange rates have been, on the whole, a bad bargain for the CFA member countries. For most of the CFA members, the inflation benefits do not appear to have been large enough to offset the costs on the output side. Under “reasonable” output-inflation tradeoffs, these countries would have been better off having the flexibility to adjust to external shocks.

In other words, the CFA franc is keeping a lid on inflation, but strangling growth in the process. And the problems go just beyond just the management of aggregate demand. As Dani Rodrik has argued, strategic devaluation of the real exchange rate was a key ingredient in the export booms that lifted Taiwan, Korea, and China out of poverty. Under the CFA franc, this kind of policy is a total nonstarter—one cannot complain about the incoherence of African industrial policy and the weakness of manufacturing growth without acknowledging that CFA countries are missing one of the key policy instruments.

Devarajan and Rodrik’s article came out in 1991. How have the CFA economies fared since then? Here’s that graph of the GDP divergence between former British and French colonies again:

From Bergh and Fink (2018): The French Curse? On the Puzzling Economic Consequences of French Colonization

I want to be careful about putting too much analytical weight on a single time series plot. But is it a coincidence that the GDP of former French colonies slid steadily downwards throughout the late 1980s, as the French Franc appreciated post-Plaza Accords—and that that decline halted around 1994, the year of the CFA Franc’s sole devaluation?

Nothing I’ve laid out here is a slam-dunk case; the developmental effects of this crucial monetary institution surely deserve a closer statistical examination. However, everything I’ve described is a fairly mainstream analysis of fixed exchange rates. In my view, the burden of proof is on defenders of the zone to show why the conventional rules don’t apply.

(Teaser: I’ve been working on an empirical paper with my coauthors Joel Ferguson and Abdoulaye Cissé that we hope to share in the coming months.)

Africa’s Last Colonial Currency?

But to conduct a purely economic analysis of the CFA is also to miss the point. The problem of the CFA is, at its heart, political.

One central notion is sovereignty: a nation’s ability to control its own currency. Europeans clearly take that right very seriously. It took national referenda for countries to join the European Union, which carried an obligation to join the Eurozone and abandon their local currencies. Needless to say, these decisions remain deeply contentious. But the citizens of the 14 CFA Franc countries were never even given that choice.

Left: France’ African Empire, 1939. Right: West (green) and Central (red) African CFA zones.

A further ugly complication is that almost all the CFA countries have surrendered their sovereignty to their former colonizer.² The map above shows the obvious continuity between France’s African empire and the modern West African and Central African CFA zones. Even the name CFA—which you may notice I haven’t yet defined—originally stood for Colonies françaises d’Afrique. After 1945, the acronym was left unchanged: CFA became the Communauté financière d’Afrique for 8 West African countries and Coopération financière en Afrique centrale for 6 Central African ones.

On the French side, the political economy for maintaining the CFA zone is fairly obvious. At independence, a 1960 article in the French newspaper La Croix was disarmingly frank about the currency’s economic benefits to the old colonial power:

It has allowed France to obtain supplies of various raw materials (lead, zinc, manganese, nickel, wood, phosphates, oilseeds...) without the need to disburse any foreign currency... It is estimated that the livelihood of 500,000 French people from the metropole depends on the economy of the franc zone.

(quoted in Pigeaud and Sylla, p. 32)

In the present day, I doubt that most of the French electorate could explain what the CFA Franc is, or articulate how it serves their material interests. But the fixed exchange rate certainly suits French special interests—most notably Orano, which supplies 10% of France’s civilian uranium demand with its mines in Niger—who can do business in Africa without a pesky currency conversion. The CFA also acts as one of the central pillars of Françafrique, France’s African sphere of influence, binding its former colonies diplomatically and militarily to Paris. The political scientist Ken Opalo has joked that, without nukes and its African sphere, France would just be Italy. In a nation that harbors Gaullist and Macronian notions of grandeur, this simply cannot stand.

On the African side, historically, the political elites of Françafrique enjoyed a close relationship with the metropole. The fixed exchange rate, generally overvalued, suited elites because it made imported goods cheap and eased the transfer of assets abroad. When there was popular discontent, and this arrangement was threatened, France was not afraid to enforce it. When Guinea’s Sékou Touré sought to leave the CFA franc upon independence, the French government launched Operation Persil, a covert operation to introduce counterfeit banknotes to destabilize the new Guinean currency. When landlocked Mali left the CFA zone in 1962, it found itself economically isolated from its neighbors, who raised commercial barriers. It returned to the CFA franc in 1984.

And these are the situations that are relatively transparent to prove.

The Road Ahead

But the geopolitical logic that held Françafrique together is starting to disintegrate. In June 2019, the Economic Community of West African States (ECOWAS) announced plans for a new common currency, the eco, which would exist independently of France and would potentially include non-Francophone countries, like Nigeria and Ghana. In December of that same year, Emmanuel Macron announced reforms to the West African CFA franc, relaxing the requirement that they deposit their reserves in the French treasury and renaming the West African CFA franc… to the eco.

Now, with a wave of military coups across West and Central Africa, ECOWAS is itself starting to fray. Last month, in February 2024, Burkina Faso, Mali, and Niger announced their withdrawal, in response to ECOWAS’s condemnation of their recent coups. The three countries are reportedly considering a new currency union of their own, separate from the CFA. And, on Sunday, we had the electoral victory of a candidate who has promised to pull Senegal out of the CFA franc. The political situation is incredibly fluid.

What remains true, however, is that even in countries that decide to leave the zone, France retains an enormous degree of influence—de jure, through its seats on the board of both CFA central banks and its hold on their reserves in Paris; and de facto, through its still-significant links to governing elites. If countries like Senegal choose to leave, it can make the transition process more difficult than it needs to be. It shouldn’t. One of the main defenses of the CFA seems to be its obscurity: French voters need to wake up, and demand an international policy more in line with France’s stated values.

The political change roiling West Africa also represents an opportunity for the United States. America should decouple its Sahel policy from France’s, as Georgetown’s Ken Opalo has argued, and adopt a stance more in line with what the people living there have been demanding, putting further pressure on Paris. In short, the West should pay attention to what African experts—from economists like Ndongo Samba Sylla to activists like Kémi Séba—have been saying about the CFA franc all along. (A good place to start reading, if you’re interested, is Sylla’s Africa’s Last Colonial Currency, coauthored with Fanny Pigeaud.)

It’s worth noting that leaving the CFA zone will likely be no growth panacea. As noted above, with the limited market integration of West African economies, even the proposed eco may not constitute an optimal currency area. Countries must also plan careful exits to avoid the risk of a spiral into inflation—perhaps an intermediate arrangement, like a shared peg to a more relevant basket of countries, may be in order.

But countries in the CFA zone deserve to make the choice of those arrangements themselves, free from foreign coercion. If the CFA zone continues, and if the population projections are correct, by 2100 France, a country of 74 million, will control the currency of a region of 800 million—a region which, over a century, it conquered, brutalized, and exploited, largely without repercussions.

Whether this is an economically efficient arrangement at least remains something of an open question. But whether it is a just one seems to me a closed book.

1. Table 3, p. 34 in the paper.

2. The exceptions are Guinea-Bissau, which was a Portuguese colony, and Equatorial Guinea, which was Spanish.