West Africa’s New Currency: The End of France’s dominance in AFRICA?

Analysts believe calls for reform of the African currency bloc, a legacy of French colonial rule, could be damaging to foreign investors.

The CFA franc, a key pillar of French influence in its former colonies, is used in 14 countries of West and Central Africa. The currency is under pressure from calls for fundamental change from African leaders. French President Emmanuel Macron also publicly announced his readiness to participate in «meaningful» reform.

The currency is pegged to a fixed rate against the euro and forces the participating African countries to deposit 50% of their foreign exchange reserves into the French treasury. This, in turn, guarantees payments in euros, even if the CFA member state is unable to fulfill import payments..

An important source of financial stability, the CFA franc is politically sensitive due to its dominance in countries that are currently independent from France for more than half a century..

«International investors can lose the confidence that comes with a fixed exchange rate that has only been devalued once since its inception in 1945», – believed senior vice president of Teneo Anna Fruhauf and vice president Malte Leverscheidt.

If the guarantee is canceled, the franc’s fixed exchange rate of 655.96 CFA to the euro will be questioned, increasing the uncertainty of foreign exchange risk for investors, importers and exporters.

In November, Benin’s leader Patrice Talon announced that the eight West African Monetary Union states that use the CFA franc were planning to withdraw their reserves from the Bank of France, telling French media that the currency had arisen. «psychological problem».

However, this decisive step has yet to come to fruition, and experts believe that substantial reform is likely to remain elusive in the near future..

14 African currencies may end peg to euro

«Regional leaders, responding to the anti-French sentiment of the population with their call for reforms, are mostly interested in the sustainability of the CFA franc, say Fruhauf and Leverscheidt. – The overwhelming importance of French investment, military aid and development cooperation minimizes the prospect of open rebellion against the CFA franc agreement».

John Eschborn, senior emerging markets economist at Capital Economics, told CNBC on Thursday that the lack of incentive for reform is due to both institutional inertia and lack of credible alternatives, as well as French resistance..

«Almost everyone agrees that the current system is imperfect and in many ways anachronistic, but despite the growing popular support for any change, I don’t think there is any real consensus on the form it will take.», – said Ashbourne.

There are many possible alternatives, each with significant implications for the region. Eschbourne suggested that the prospect of pegging to a basket of currencies, a free-floating franc, or even abolishing the franc in favor of national currencies will depend on strengthening regional or national institutions to provide a sound policy framework in the absence of French support.

This will likely require a consensus among regional leaders and complex legal agreements in the bloc’s member states. These include Benin, Burkina Faso, Guinea-Bissau, Cote d&# 39; Ivoire, Mali, Niger, Senegal, Togo, Cameroon, Central African Republic, Chad, Congo-Brazzaville, Equatorial Guinea and Gabon.

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