By Nfor Nwayuke Susungi
The Maastricht Treaty of Economic and Monetary Union did not specifically address the relationship between France and the Franc Zone. It merely recognized the national budget of each member state of the EC as a sovereign domain, subject to deficits being limited to less than 5% of GNP, which is one of the convergence criteria that must be met in order to qualify for EMU. However, since the convertibility of the FCFA was guaranteed through the budget of the French Treasury, which manages the Operations Account, the maintenance of the Franc Zone in its present form was not deemed to be in direct conflict with the provisions of the Maastricht Treaty.
As part of the convergence criteria for EMU, the Stability and Growth Pact (SGP) was adopted in 1997 so that fiscal discipline would be maintained and enforced in the EMU. Member states adopting the euro were required to meet the Maastricht convergence criteria, and the SGP and to ensure that they continue to observe them. The actual criteria that member states must respect are:
- An annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc.)
- A national debt lower than 60% of GDP or approaching that value.
- Since the official launch of the Euro on 1 January 1999, the FCFA has been tied to the Euro at a fixed rate of FCFA 655.957/Euro. On the first day of trading, 5 January, 1999, since its launch, the euro climbed to 1.19 USD.
The Eurozone under Structural Adjustment
One decade after the launch of the Euro, the currency is in trouble because many of the Eurozone member countries have attained a level of public sector indebtedness which is either close to or in excess of 100% of GDP. Basically nearly all the Eurozone countries are now in violation of the Stability and Growth Pact of 1997 both in terms of fiscal deficit as a percentage of GDP and in terms of total public sector debt as a percentage of GDP. What this means is that most of the Eurozone countries borrow vast amounts of money from their banks in order to finance their fiscal expenditures. Countries such as Greece, Ireland, Italy, Portugal and Spain owe more money to the banks than their entire annual output of goods and services.
These countries are all under tremendous pressure to reign in their fiscal expenditures and to introduce reforms in order to avoid being downgraded by the rating agencies because that will result in an increase in their borrowing costs.
We are now witnessing something in Europe today which we thought could only happen in poor Third World countries in the mid-1980s when the World Bank and the IMF put African countries through Structural Adjustment programmes involving salary cuts, devaluation of currencies, privatization of public sector companies, recapitalization of banks etc. These Eurozone countries are all being managed under the watchful eye of the IMF. Cameroonians will never forget the 60% salary cuts of 1993 which was followed by the devaluation of the FCFA in January 1994.
As fiscal reforms are unpopular and most of the big spenders in the Eurozone are the Mediterranean countries, there are now fears that the Eurozone could break up. There are even fears that the Euro itself is in danger because the weak economies which are under pressure to reform may only survive if they pull out of the Euro and reintroduce their national currencies so that they can devalue and create conditions for renewed economic growth.
The reason why this Euro debate is of interest to us is that the FCFA is tied to the Euro at a fixed parity of FCFA 655.957/Euro. The question that is of interest to us is what shall become of the FCFA in the event that the Euro collapses. The simple answer is “nothing”. This is because we know that even in the unlikely event that France goes back to the FF, France will continue to guarantee the convertibility of the FCFA as long as the Operations Account architecture is maintained.
Many of the political parties that contested the Presidential elections advocated the delinking of the FCFA from the French Treasury as a means of attaining our monetary independence from France. As populist as this may sound, we need to consider this very carefully and understand the factors that must come into play before we can cut the umbilical cord with France. First of all the way that the Operations Account works is that if the countries exhaust their foreign exchange holdings in the Operations account as a result of excessive importation of goods in the face of a weak export base, the French Treasury will allow the Operations account to go into the red (i.e. an overdraft).
Article 7 of the Operations Account Convention of 1973 states as follows:
When the Operations Account shows a debit balance, the Central Bank (BCEAO/BEAC) shall pay interest on such balance at a rate which shall be fixed as follows:
- On the tranche comprising between 0 and 5 million francs – 1%
- On the tranche comprising between 5 and 10 million francs – 2%
- Above 10 million francs: a rate equal to that fixed in the following paragraph.
When there is a credit balance, the average amount of funds on deposit in the course of each quarter shall bear interest at a rate equal to the arithmetic mean of the Bank of France’s intervention rates on the shortest term government securities during the quarter under consideration.
There is no doubt that the coming into effect of the Euro in 1999 brought about some changes in the rate structure stated in Article 7 of the Operations Account Convention.
Why the Operations Account of the CFAZONE went into Deficit
It is worth noting that the application of the principle of unlimited convertibility of the FCFA was largely responsible for the economic crisis which CFAZONE countries (such as Cameroon) suffered between 1986-1994 because it allowed for the possibility of FCFA banknotes being taken out of the CFAZONE and being freely exchangeable to any other currency anywhere in the world. This resulted in such a massive outflow of FCFA currency from the CFAZONE that a liquidity crisis was created in commercial banks making it impossible for them to honour cash withdrawals requests for fairly minor amounts from their clients. This liquidity crunch was largely responsible for the collapse of the Cameroonian economy which shrank from a GDP of around US$12 billion in 1986 to a GDP of around US$7 billion in 1994.
The second effect of this massive outflow of FCFA currency from the CFAZONE was that the Operations Account of BEAC and BCEAO was thrown into deficit for the first time since its establishment because each time that FCFA currency notes were exchanged for foreign currency anywhere in the world, they were eventually presented to the French Treasury which debits the Operations Account of the relevant Central Bank in FF before repatriating the currency to the Central Bank. In order to bring this round tripping cycle of capital flight to an end, the two Central Banks took a very important decision in August 1993
On Sunday 1 August 1993, following a major crisis in the Exchange Rate Mechanism (ERM) in the European Union, the West African Monetary Union (UMOA) announced in a communiqué released in Dakar that it had decided to suspend, as from the 2nd of August 1993, the repurchase of Franc CFA notes exported outside of African member countries of the Franc zone. The communiqué went on to say that this measure, which limits itself to the physical transfer of bank notes, does not introduce any restrictions on legitimate and official international transactions, nor does it infringe on the principle of the freedom of transfers within the Franc zone or on the free convertibility of the currency which is guaranteed by Co-operation Agreement with France. A similar communiqué was issued in Yaoundé by authorities of BEAC along the same lines.
The decision to restrict the movement of currency notes outside of the CFAZONE was extremely important because this brought an end to the shady transactions which were involved in the movement of large volumes FCFA notes (in suitcases) to Europe by corrupt politicians in order to convert them into FF, for deposit in their overseas accounts, and oblige the French Treasury to honor its obligations by debiting the Operations Account of the relevant Central Bank. The decisions of BEAC and BCEAO of August 1993 were intended to ensure that only legitimate transactions within the CFAZONE would result in the Operations Account being debited.
The devaluation of the FCFA in January 1994 was partly intended to strengthen the impact of the restricted convertibility decision of August 1993 because the devaluation was intended to make all imports more expensive and thereby discourage the frivolous importation of consumer goods (such as champagne or “Eau de Bafoussam”). The combined effect of the restricted convertibility of August 1993 and the devaluation of January 1994 is that it has enabled all the CFAZONE countries to build up their foreign exchange reserves.
As at December 2010 the Operations Account of all the FCFAZONE countries of UEMOA and CEMAC showed a credit balance in their Operations Account. The total amount of foreign reserves for UEMOA countries was US$10.1 billion or 12% of UEMOA’s GDP and the equivalent amount for CEMAC countries was US$ 12.54 billion or 16% of CEMAC’s GDP. While Cameroon and Cote d’Ivoire are the largest economies of the CFAZONE with foreign reserves of US$3.6 billion or 16% of their respective GDPs, the Republic of Congo has the highest reserves in the Operations Account with US$4.4 billion in foreign reserves or 34.6% of GDP. Meanwhile tiny Equatorial Guinea is the rising star of the CFAZONE whose GDP is already larger than that of Senegal and which is sitting on foreign reserves of US$2.3 billion or 14.8% of GDP. Thanks to its oil revenues, the economy of Equatorial Guinea is growing so fast that it will probably overtake Cameroon and Cote d’Ivoire to become the largest economy on the CFAZONE in 5 years.
To be continued... Part III: Why UEMOA and CEMAC should be merged.
©Copyright December 2011; Nfor Nwayuke Susungi
Image courtesy of Wikimedia