By Nfor Nwayuke Susungi
"Is the CFAZONE ready to stand on its own by severing the umbilical cord with the Operations Account? Can a country such as Cameroon go it alone? My answer to both questions is a definite NO."
How should the CFAZONE be reformed?
Against the background of crisis in the Eurozone and the possible (but unlikely) collapse of the Euro and the stable economic and monetary situation which currently exists in the CFAZONE, with extremely low inflation, the question is in what direction should the CFAZONE chart its future? Is the CFAZONE ready to stand on its own by severing the umbilical cord with the Operations Account? Can a country such as Cameroon go it alone? My answer to both questions is a definite NO.
Let us look at Cameroon first because some of the political parties which participated at the last Presidential elections in Cameroon have suggested that Cameroon should assume its monetary sovereignty. If a country such a Cameroon which is both a link country and a transit country in CEMAC, and above all plays host to BEAC, were to decide to pull out of the monetary union in order to create its own currency, this will result in economic chaos and political instability for the whole region. It will destabilize and throw into doubt the economic future of landlocked countries such as Chad and CAR which depend on Cameroon for external economic linkages.
As regards the idea of severing links with the Operations Account and the French Treasury, it is premature to consider such an option, regardless of whether the Euro survives or not. The Operations Account Convention is an “Exchange Risk Swap” which enables the French Treasury to guarantee the convertibility of the FCFA into any other currency on condition that 65% of the foreign reserves of the CFAZONE are placed in the French Treasury. This arrangement has the advantage that the foreign reserves of the CFAZONE countries are probably safer in the French Treasury than in BNP Paribas or Citibank or even in Bank of America or JP Morgan Chase because the French Government enjoys a higher credit rating than any of these banks.
Is it time to create the “Afric”?
The severing of the links with the French Treasury will entail the creation of a new currency (which will no longer be called the FCFA, let us call it the “Afric”), the closure of the Operations Account and the placement of the reserves of BEAC and BCEAO in commercial banks. The Central Banks will have to devise a mechanism (such as auctioning) for allocating foreign exchange to importers for legitimate import transactions. As the convertibility of the “Afric” will no longer be guaranteed by the French Treasury, its exchange value with other currencies in the world, including the Euro, will quickly decline (like the Naira, the Ghana Cedi, the K-shilling, or the Zimbabwe $) depending on the availability of foreign exchange to cover imports. The much-feared devaluation of the FCFA will become a daily phenomenon with the “Afric” and inflation will take control of the economy.
The “Afric” scenario is intended to show that while the FCFA link to the French Treasury may be politically unacceptable for the hungry nationalists, the decoupling of the FCFA from the Operations Account has consequences which have not yet been fully understood by its advocates. Based on the principle that you cannot manage risks that are not yet fully understood, the creation of a new currency for the CFAZONE is both premature and too risky.
The need to Build Foreign Reserves
There is nothing in the present architecture of the CFAZONE which is inherently inimical to economic expansion and development of its member countries. While maintaining links with the Euro through the French Treasury, the CFAZONE countries such as Cameroon can continue to expand economic sectors such as petroleum, cocoa, coffee, cotton and other export oriented agricultural activities which will enable them to increase GDP and increase their foreign reserves.
In my presidential platform document which was entitled: The “Newcam Prosperity Pact”, I proposed a programme called the “Vegetable Oils Initiative” which will involve expanding the production of palm oil, avocado oil, Jatropha oil and Safou oil so that by the year 2025 the country will be producing 12 million MT of vegetable oils for exports. I also endorsed the aluminum project by which Rio Tinto Alcan of Canada proposes to expand aluminum production in Cameroon to nearly 1.4 million MT, based on the development of a dedicated port in Kribi, the development of a hydroelectric power station in Song Mbengue and the construction of a dam in Lom Pangar. There is nothing in the CFAZONE architecture which impedes these projects from seeing the light of day in Cameroon.
All of these projects will enable Cameroon to build its foreign reserves to a level where by the year 2025, the country can have foreign reserves which are equivalent to 50% of GDP. If Cameroon can build its foreign reserves to that level, then we can start discussing how to renegotiate the Operations Account Convention in order to give the CFAZONE countries the freedom to chart their own future, including the possible creation of the “Afric”. But in the meantime, what should the CFAZONE countries do in the light of the political, economic and monetary uncertainties in Europe and the Eurozone?
Merger of CEMAC and UEMOA
The geographical position of Cameroun places it at the crossroads between two regions. It is at the same time a transit country within the CEMAC region and a link country between CEMAC and ECOWAS. It is also the immediate neighbor of Nigeria, a country whose population is expected to reach 300 million people by the year 2060. These demographic parameters require that development planning should be undertaken with the view to enhance regional cooperation with neighbors.
The CEMAC region uses the FCFA as their common currency whose Central Bank (BEAC), is based in Yaoundé. The combined GDP of the CEMAC countries in 2010 was estimated to be 75 billion US$. Meanwhile, the UEMOA countries which also use the Franc CFA as their common currency have a combined GDP of 72 billion US$.
Although the two currencies are called Franc CFA, they have distinct ISO-4217 Codes because for the CEMAC region, the code is XAF while for UEMOA, the code is XOF. Given that the two currencies have the same parity with the Euro, and are used in a continuous geographical region from the Republic of Congo to Senegal, there is no logical reason why the two monetary zones should not be combined in order to create one single currency. What is required is for BEAC and BCEAO to merge in order to form one single central bank that will serve as the issuing authority for the two regions whose combined GDP will be around 150 billion US$. The new central bank will issue the currency that will have a new ISO-4217 code.
The merger of UEMOA and CEMAC into one single monetary zone will be followed by the introduction of the free movement of goods and people from the Republic of Congo to Senegal. The free trade within the expanded region using a single currency will constitute the major boost to economic activity in the entire region.
The Creation of a Single Issuing Authority
One of the approaches which shall be explored for merging UEMOA and CEMAC shall be to establish a common currency issuing institution in a country which is centrally located between BEAC (Yaoundé) and BCEAO (Dakar) such as Cote d’Ivoire. The two central banks shall detach their staff who are responsible for currency management to this common currency issuing institution, while all other central banking functions shall continue to be managed by BEAC and BCEAO as independent central Banks. However, the two central banks shall continue to be the agencies through which currency issued by the common issuing institution shall be distributed to the banks in each region. It is understood that if the common issuing institution is based in Cote d’Ivoire, then the head of the institution would be designated from CEMAC.
The second aspect of regional integration shall involve the negotiation of protocols between ECOWAS and CEMAC in order to provide visa-free travel for all the citizens of ECOWAS and CEMAC. The current pernicious travel restrictions are a considerable drag on regional trade and should be removed for the benefit of the nearly 600 million people that are expected to live in this region by the year 2060.
©Copyright December 2011; Nfor Nwayuke Susungi
Image courtesy of the BBC.