Pros and cons of new West African currency for Côte d'Ivoire

 

Côte d’Ivoire’s high level of regional integration is evidenced in numerous ways: it is a net exporter of energy, has ratified free movement protocols of the regional economic blocs it belongs to – including ECOWAS and the Community of Sahel-Saharan States – and has played its part in successfully implementing convergence agendas set by the eight-country economic and monetary union UEMOA.

The topic of enhanced monetary and economic convergence has been brought to the fore in recent years, with calls to rename and restructure the West African CFA franc accompanied by a renewed push from ECOWAS for stronger monetary ties and the establishment of its own currency to bolster trade and economic growth across the bloc. However, differences in approach are making coordination between member states difficult.

State of Play

Since the UEMOA bloc – which also includes Benin, Guinea-Bissau, Burkina Faso, Mali, Niger, Senegal and Togo – shares the West African CFA franc as a common currency, monetary policy is necessarily restrained to achieve financial stability across the economies and maintain the currency’s peg to the euro, which at the time of writing stood at CFA656:€1. The West African CFA franc also shares a 1:1 peg to the Central African CFA franc, used by six other African countries. Both regional currencies are backed by the French government under a long-standing arrangement.

Based out of the Senegalese capital Dakar, the Central Bank of West African States (Banque Centrale des Etats de l’Afrique de l’Ouest, BCEAO) regulates monetary policy in the eight countries that share the West African CFA franc.

In Côte d’Ivoire, and other UEMOA countries, monetary convergence has helped keep excessive inflation at bay. According to the IMF, inflation stood at 1% in 2019 and was projected to remain at around 2% from 2020 to 2024 – well below UEMOA’s inflation convergence criterion of 3%. The macroeconomic stability and stable interest rates afforded by the fixed exchange rate peg not only helped Côte d’ Ivoire’s economy rebound after 2011 by making it more attractive to foreign investment, but also provided a platform for strong intra-regional trade.

Two Sides of the Coin

Despite the benefits afforded by the shared currency, the CFA franc’s name and origins have made it a contentious political issue among many locals. Established in 1945, the currency is guaranteed by the French state, but this comes with the requirement that members of the currency union keep half of their foreign exchange reserves in the French Treasury. As of May 2019 these funds amounted to as much as €10bn.

“There is some opposition towards the CFA franc, in part because of the need to keep reserves in France,” Alban Ahouré, director of the Economic Policy Analysis Unit of the Ivorian Centre for Economic and Social Research, told OBG. “For many people in the region, it would make sense to take those reserves and use them to invest, perhaps avoiding the need to raise debt to finance the development of their economies.”

Having the CFA franc backed by the French Treasury has also allowed French officials to join BCEAO organisations, a situation which is interpreted by a number of people from West Africa as undue meddling in the region’s economic affairs by the former colonial power. In November 2019, for instance, Patrice Talon, President of Benin, told local media, The topic of enhanced monetary and economic convergence has been brought to the fore in recent years, with calls to rename and restructure the West African CFA franc accompanied by a renewed push for stronger monetary ties “Psychologically, with regards to the vision of sovereignty and managing your own money, it is not good that this model continues.”

A New Currrency

Partial changes to the existing currency system are already under way. During a meeting in Abidjan in June 2019 that brought together the finance ministers and central bank governors of the various ECOWAS member states, Adama Koné, Côte d’Ivoire’s minister of finance at the time, stated that the regional single currency was “no longer a technocratic utopia”, pointing to a growing political will to drop the West African CFA franc and create a currency that is used by all West African countries, not only UEMOA members.

This is set to happen through the launch of a new regional currency, the eco. Although the goal of a monetary union has been mooted since ECOWAS was formed in 1975, it has been subject to many delays. The intention to launch a single currency among the non-CFA-franc countries of the region was first proposed in 2000, but questions abound on issues such as how to go about institutional preparation, whether an external exchange rate anchor was necessary, or how the currency might work alongside or merged with the West African CFA franc later down the line. Even today, with ECOWAS aiming to launch the new currency as soon as possible, similar questions remain, and disputes have also arisen over how best to implement the plan.

During a high-level meeting held in Abidjan in December 2019, President Alassane Dramame Ouattara and President Emmanuel Macron of France discussed a new currency for UEMOA. Known as the eco, it will reportedly remain pegged to the euro and backed by the French state. However, UEMOA members will no longer be required to house half of their foreign exchange reserves in the French treasury under the new monetary system. The position of a French representative on the executive board of the new currency’s regional central bank will also be eliminated. “While there is the political will to create a new currency, a strict timeline has not yet been made clear,” Ahouré told OBG.

Competing Plans

The introduction of the new eco currency by the eight UEMOA member states as it stands appears to be more a change of name than the introduction of a new region-wide currency, even if the joint statement made by the French and Ivorian presidents suggests some adjustment to the structural framework of the existing union.

The announcement has attracted criticism from other ECOWAS members, including Nigeria and Ghana, since it encumbers plans to launch a regional currency with the same name under the auspices of the ECOWAS bloc. Indeed, the name eco had been selected during a 2019 meeting where ECOWAS countries had agreed to establish a single currency for the entire West African region. The disagreement between the eight countries currently using the CFA franc and the wider ECOWAS union might have been spurred by pressure among UEMOA members to scrap their currency and the slow level of progress achieved by ECOWAS to introduce its own monetary system, according to local press reports.

Looking Ahead

UEMOA’s eco plan was expected to go ahead in 2020, but according to regional media in April that year, there were several hurdles that stood in the way of rolling out the eco: the requirements that public debt levels are kept below 70% of GDP and inflation remains in single figures; and the global disruption caused by the Covid-19 pandemic. To minimise the impact of the health crisis in Côte d’Ivoire, the IMF approved a $886.2m disbursement to the country in mid-April. According to the organisation’s revised projections published that same month, sub-Saharan Africa is forecast to see an average GDP contraction of 1.6% in 2020. However, the IMF forecasts GDP growth for all sub-Saharan African countries in 2021, suggesting that the economic effects of the pandemic will be relatively short lived.

Nevertheless, continued political will to create a single currency for ECOWAS could be sustained by the potential economic dividends that could come from a region-wide currency, namely its ability to foster more intra-regional trade, but significant economic disparities exist between ECOWAS members. Inflation levels and budget deficits, for instance, vary widely within the bloc, and besides the needed reforms and fiscal discipline, many structural issues would need to be resolved through rapid policy-making if the 2020 target is to be met.

Realistically, the establishment of a broader monetary union is likely to advance in incremental steps, with countries joining as they become ready to operate under the necessary conditions. Whether this new currency development further entrenches the dispute with ECOWAS members that do not use the CFA franc, or encourage larger ECOWAS countries such as Nigeria and Ghana to take faster steps towards monetary integration, remains to be seen.

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The Report: Cote d'Ivoire 2020

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