In a recent discussion on Facebook, spurred by recent rumors of a possible devaluation of the Franc CFA, the currency used by 14 Francophone African countries, I asked Dr. Nfor Susungi, a former senior official at the African Development Bank, the following question: "What do you make of the argument that governments in Francophone Africa are stubbornly clinging to the Franc CFA because of the (false) prestige factor (i.e., having a convertible currency), outright laziness, and risk aversion - too scared to go-it alone?" Here is the Part 1 of his three-part response.
What is the Future of the FCFA Zone in West and Central Africa?
By Nfor Nwayuke Susungi
one of the burning issues facing countries of the Franc Zone in Africa today is what to do about this currency arrangement following the introduction of the Euro in 1999. So far the appearance is being given that the problem was solved by simply pegging the CFA to the Euro and renewing the Operations Account Agreement with the French Treasury and going back to business as usual. This is all a way of sweeping a serious problem under the carpet in the living room. But with every passing day a hump is growing in the living room under the carpet and nobody seems to understand what is really going on.
Let us start by going back to the very origins of the French Franc.(FF)The FF has existed since December 5th 1360. The reason why the date is known so precisely is that the creation of the Franc was the result of an ordinance which was signed by King John II of France (also known as Jean Le Bon) under circumstances which were quite unusual.
After a disastrous defeat of the French army by the English at the battle of Poitiers, the French King, Jean Le Bon, was made prisoner and taken to the Tower of London where he was held in captivity for four years. He was finally freed, on bail, by Kind Edward III of England in October 1360. The bail or ransom was set at £3.5 million (or the equivalent of 12.5 tons of gold).
This was a colossal sum of money. The French King landed in Calais on October 25, 1360 and started the journey to Paris where the French people who had been deprived of their King for four years anxiously awaited him. Anticipating a wave of sympathy from his subjects, he decided to sign a decree, during a stopover in the town of Compiegne on December 5, 1360. The decree introduced new taxes aimed at raising revenue to pay for his bail and to solemnly introduce a new currency which he called the “franc”.
The decree states as follows: “Nous avons ordonné et ordonnons que le denier d’or fin que nous faisons faire à présent et entendons à faire continuer, sera appelé Franc d’or”. (La Légende du Franc, by Georges Valance, Editions Flammarion 1996. The lose translation of this text is as follows: "We have ordered that the gold coin which we have ordered to be made, and intend to continue to have made, shall be called the gold franc").
The reason why the French King chose to call the new gold coin “Franc d’or” is revealed in the rest of the remarks which he made on that occasion when he said,
“Nous avons été délivré à pleins de prison et nous sommes franc et deliver pour toujours... Nous nous sommes retrouvés en notre royaume franc et délivré” / "We have been fully released from prison and are totally free and delivered forever. We arrived in our kingdom totally free and delivered."
The interesting thing here is the word “franc” in French which appeared several times in the text of the decree. The word “franc” in French or “frank” in English means, among other things, “free from bondage” or “having total freedom to act without constraint”. It would seem therefore that the French King decided to call the new gold coin the “franc” to signify either a celebration of his freedom from captivity or to let the French people know that it was the currency that was needed in order to pay for his ransom to the English King.
The word “franc” was deliberately chosen by the French King to convey a very powerful use of subtlety in the French language in order to capture the imagination and the patriotic sentiments of the French people at a time when the King needed them dip into their wallets to raise money to pay his ransom to King Edward III of England.
Whatever the case, after the introduction of the “franc”, this currency has represented for the French people for over 637 years the very essence and embodiment of being French and the notion of total freedom to act without constraint. In spite of this, French President François Mitterrand signed the death warrant of this currency when he signed, on behalf of France, the treaty of Maastricht on December 10, 1991. The franc ceased to be the national currency of France beginning on January 1, 1999 when the Euro was introduced, and by the year 2002 the franc was entirely demonetized and replaced by the Euro in the Hexagon.
The disappearance of the FF has raised many questions for African countries which are members of the Franc Zone. The building blocks of the Franc Zone as it exists today, were put in place in 1958 when President Charles de Gaulle introduced the constitution of the 5th Republic instituting a sort of Federalism by variable geometry by which the various colonies and overseas territories were tied to Metropolitan France by specific constitutional links which were either loose or tight depending on the historical links with metropolitan France; but they were all bound to France by monetary cooperation agreements tying their currencies to the FF.
In effect all overseas territories were on a FF standard and were regulated through the Operations Account Convention by which derivative currencies (such as the FCFA) issued in overseas territories did not have to have 100% backing in hard currency reserves as was the case in the Currency Boards set up by the British government in its former colonies. These derivative currencies were given an “unlimited guarantee of convertibility” by the French Treasury which managed the Operations Account.
Tunisia, Morocco and Algeria understood the disadvantages of this monetary arrangement very early and that is the reason why immediately they became independent, they all withdrew from the Operations Account agreement and created their own currencies. The Tunisians and the Algerians use the Dinar and the Moroccans use the Dirham. They have all been able to develop stable economies based on tourism and natural resources and to build healthy foreign exchange reserves. This has tremendously strengthened their economic and political independence. But unfortunately, our poor francophone countries in sub-Saharan Africa have never been able to wean themselves from the feeding bottle of France.
The question which is now facing African countries in the Franc Zone of West and Central Africa is what shall happen to the Franc CFA, now that FF has disappeared from existence altogether? The answer is that nobody really knows. All the political leaders of the Franc Zone countries are remaining very quiet because they really do not know. The silence is partly because they did not know what to really make of the French decision to give up the FF after over 600 years.
The domain of monetary theory and management has always been presented by French government officials as being too abstract for Africans to understand. Consequently Africans should not even waste their time trying to understand it. As a result, there are not many renowned economists in Franc Zone countries who can speak with confidence about how to reform the Franc Zone.
The French government started with assurances that after the Euro comes into effect the FCFA will simply find a new exchange value with the Euro, and France will continue to respect its treaty obligations to guarantee the convertibility of the FCFA into the Euro through the Operations Account. That is what has happened so far since 1999.
But this begs the larger question of what the devil are African countries are still doing with a currency called the “Franc” which was first issued over 600 years ago to celebrate the freedom of a French King being delivered from captivity, when in fact the Franc CFA is nothing but part of a political arrangement aimed at ensuring that African countries should forever be deprived of the ability to act with any degree of freedom?
The first tragedy is that even the French authorities themselves have no idea what to do in the wake of their own decision to jettison the FF. The decision to maintain the FCFA for African countries subject to questionable guarantee of convertibility to the Euro by the French Treasury was adopted simply because nobody either in France or in the African countries knows what else to do. Whether this arrangement produces any positive tangible economic result or not in Franc Zone countries does not concern the French Government. Their main concern is: are the Africans complaining or not. If they are not complaining, then why worry? Do the Africans know that any of their problems are coming as a result of the present monetary arrangement? If they do not, then so much the better.
Let me give you an example. In the UEMOA and CEMAC countries, one of the strangest problems facing the economy is lack of change. Many business transactions cannot be consummated because the merchant does not have change, especially for 10,000 FCFA notes. If you enter into a taxi in Douala or Abidjan, you better announce in advance to the driver if you are carrying a 10,000 FCFA note. You will be shocked how long two of you will take before you can get change at the end of the journey. The question is where this problem is coming from. The answer is that the problem has been created by the Central Bank itself for failing to mint enough coins and issuing them into circulation so that merchants can give you changes on the spot.
The problem has persisted for decades resulting in artificial price increases when customers have to accept not getting their proper change. It has been estimated that if the Central Bank (BEAC and BCEAO) were to issue coins in sufficient quantities so that change is available everywhere on the spot, this can contribute to almost a 1% point in economic growth in Franc Zone countries. Why has this problem escaped everybody including the Bretton Woods institutions?
The second tragedy is that the World Bank and the IMF lack the intellectual courage to tackle the pressing monetary issues facing Franc Zone countries in Africa. The Bretton woods institutions are afraid of offending the French government. Consequently, no IMF or World Bank official wants to attract the ire of the French Government by advocating any reform programmes which Paris might feel uncomfortable with.
A few months ago when the Euro strengthened in value against the US$ to a peak of nearly US$1.3/Euro, the reality is that it made the FCFA overvalued against the US$. As we speak today, the FCFA is still grossly overvalued against the US$. Based on the economic fundamentals of the Franc Zone countries, the appropriate exchange rate between the FCFA and the Euro should be around 2000-3000 FCFA/Euro. This is the parity rate which will enable the FCFA to reflect its true exchange value against the US$. But nobody is talking about the possibility of devaluing the FCFA because France is scared of the chaos that it will unleash in the African countries.
The question is why are the World Bank and the IMF not saying anything about this? The simple answer is that the World Bank and the IMF have become so political and so politicized that they have lost their intellectual courage.
Ultimately, the solution is not even devaluation of the FCFA. The solution is a more radical reform of the monetary system which will enable the countries that are members of the Franc zone to create a completely new currency which will sever all links with France Treasury but still maintain the advantages of monetary union between African states. But this is a tall order which requires that in countries like Cameroon, Gabon, Chad Central African Republic etc. there should be people who are able to sit down and think through the complexities of establishing an independent currency.
This is not possible because any economist or Finance Minister in any of these francophone countries who stands up to advocate such a thing will be made to pay a very heavy price very quickly.
As I have said before the cooperation agreement which Cameroon signed with France in the 1960s makes absolutely no room for any intellectual African upstart to engage in any type of independent thinking. I have firsthand experience about this because I personally paid a heavy price when I was a senior official in the African Development Bank, for daring to express independent views on monetary policy in the Franc Zone. Come rain or shine, the country just has to toe the French line.
Someone described the predicament of the Franc Zone by saying that the Operations Account arrangement which was first introduced by President Charles de Gaulle in 1958 for African countries is like riding a bicycle. The rider must keep paddling the bicycle in order to maintain his balance because once he stops, he will fall off.
Note: I wrote this article after the coming into effect of the Euro in 2002. But since then nothing has been done to change the status quo. However, when I decided to be a candidate for the Presidential elections of October 2011, I prepared a platform document known as the “Newcam Prosperity Pact” in which I articulated a different approach to managing the Franc Zone in UEMOA and CEMAC. This new proposal shall be published in a separate note.
© Copyright December 2006; Nfor N. Susungi firstname.lastname@example.org
Postscript (Facebook December, 17, 2011)
The most important aspect of the Franc Zone architecture is the Operations Account Convention by which Franc Zone countries, through BEAC and BCEAO, are required to place 35% of their foreign exchange holdings with the French Treasury. In return for that the French government gives a guarantee of convertibility to the FCFA to any currency in the world, through a fixed parity which the FCFA currently maintains with the Euro.
Many of us jump to conclusions and say that this is French neocolonialism. This is partly true. But there are some advantages. Those of you who are in America and in Europe can easily receive money from home by Western Union in US$. That is one of the advantages of the Franc zone arrangement because the compensation is done through the French treasury. The Franc zone provides for financial mobility within the Zone. That is important.
There is really nothing unusual about the Operations Account Convention because it works like a collective “Exchange Risk Swap” for the Franc Zone countries. By depositing part of your foreign exchange earnings with the French Treasury, this serves as an insurance policy which enables France to protect the FCFA from exchange rate swings against the Euro. That is not a small advantage.
When we say that the Franc Zone countries need to disconnect themselves from France what it means really is that the Operations Account that BEAC and BCEAO maintains with the French Treasury should be closed. That can be easily done, if that is what the member countries of the Franc Zone want. But are they economically and intellectually ready to manage the economic consequences of this monetary independence? We shall take a closer look at this issue when we examine in my next posting the current foreign exchange reserves of each country in the Franc Zone.
To be continued...Part II: The Maastricht Treaty and the CFA ZONE.