Home ForexArticles Analysis-For West African boards, CFA franc pits sovereignty against convenience By Reuters

Analysis-For West African boards, CFA franc pits sovereignty against convenience By Reuters

by SuperiorInvest

© Reuters. FILE PHOTO: Burkina Faso's acting president Ibrahim Traore attends a meeting with Russian President Vladimir Putin following the Russia-Africa summit in St. Petersburg, Russia, July 29, 2023. Alexander Ryumin/TASS Host Photo Agency via REUTERS/File Ph

By Joe Bavier and Boureima Balima

JOHANNESBURG/NIAMEY (Reuters) – Days after Burkina Faso, Mali and Niger announced last month they were leaving the West African political union ECOWAS, Burkina Faso's military ruler Ibrahim Traore was already naming his next target: the franc CFA of the region.

“It's not just the currency. Anything that keeps us in slavery, we will break those bonds,” the 35-year-old army captain turned coup leader said in an interview posted on YouTube.

The three countries jointly announced on January 28 that they would withdraw from the Economic Community of West African States (ECOWAS) after it pressured them to restore constitutional order following a series of coups.

Having expelled French soldiers and pushed back a UN mission in Mali, these states have consistently demonstrated that they value sovereignty over expediency.

Its attitude towards the euro-pegged CFA franc appears no different, although economists and experts say ditching the CFA franc would be riskier and significantly more complicated than withdrawing from ECOWAS, a move seen as a bold, if potentially ill-advised, act of defiance. .

Last November, the finance ministers of Burkina Faso, Mali and Niger said they would weigh the option of establishing a monetary union, and senior officials from all three countries have expressed, to varying degrees, their support for abandoning the currency.

Niger's junta chief Abdourahamane Tiani said Sunday in an interview on state television that abandoning the CFA franc would be a sign of sovereignty and a necessary step away from French “colonization.”

However, doing so would mean much more than simply printing new banknotes.

A newly created central bank would need to manage a delicate transition away from the CFA franc, formulate monetary policy and decide what to do with the more than $4.6 billion in outstanding CFA-denominated regional bonds.

'THE FRENCH ROBBED US'

The CFA franc coins – one from West Africa and one from Central Africa – are at the center of an emotional debate over sovereignty and development in Francophone Africa.

Its defenders welcome the pegging of the CFA franc to the euro as a guarantee of macroeconomic stability in one of the most volatile regions of the world.

Critics denounce it as a brake on growth and an outdated vestige of French colonial rule: until a 2019 reform, countries were required to keep a portion of their foreign exchange reserves in the French Treasury.

But never since its creation in 1945 has there been the prospect of such a massive exodus.

“The French have robbed us with the CFA franc. African countries must definitively break with this currency,” said Omar Issoufou, a 25-year-old Nigerien studying electrical engineering in the capital, Niamey.

The military coups that have spread across the arid Sahel region were driven by anger over Islamist violence, which the UN mission in Mali and an extensive French anti-militancy operation had failed to quell.

The punishment for the coups – the imposition of economic sanctions by ECOWAS, including the freezing of some of Mali's and Niger's assets held by the regional central bank – fueled tensions between the new regimes and the Economic and Economic Union. West African Monetary Authority, known by its French acronym UEMOA. .

“The moment UEMOA became a weapon of war… I can understand why these three countries acted to clearly free themselves from their commitments to the Union,” Hamma Hamadou, former head of Niger's tax authority, told Reuters. .

Beyond ideological issues of sovereignty and practical concerns related to sanctions, some see the abandonment of the CFA franc as an opportunity.

“The CFA franc has been very detrimental to these countries in the long run,” said Ndongo Samba Sylla of International Development Economics Associates, a network of economists focused on the Global South. “They have lower inflation and greater currency stability, but they have suffered from an overvalued currency.”

All three countries have primarily agricultural economies. But its inability to set monetary policy has left its exports uncompetitive, he said, and hampered industrial development.

Meanwhile, pegging to the euro makes little sense when most of West Africa's foreign trade is conducted in dollars, he added.

'GREAT DEPRESSION'

Withdrawing from ECOWAS already seems easier said than done. Disentangling their economies and finances from WAEMU will be even more delicate.

The eight members of the UEMOA deposit their foreign exchange reserves in the regional central bank based in Dakar. Those reserves are mutualized as are liabilities, making it a difficult calculation to determine how much each country could part with.

Then there is the issue of CFA-denominated debt. Burkina Faso has more than 1.2 trillion CFA francs ($1.99 billion) in bonds outstanding. Mali has just over one trillion CFA francs, while Niger has 498 billion CFA francs.

“We will enter a zone of turbulence if these countries withdraw,” said a financial expert involved in regional debt issues, who asked not to be identified due to market sensitivity.

There was no clarity, he said, on where the bonds would be listed, whether they would remain in CFA francs or even whether the new currency would be convertible.

“There would be many problems for the holders of these sovereign bonds,” he said.

The turmoil would likely leave the three states cut off from future financing from regional and international capital markets, experts said. Burkina Faso has already canceled a bond auction following the announcement of its withdrawal from ECOWAS due to lack of interest.

Uncertainty could lead to capital flight and immediate depreciation of a new currency. Imports could become prohibitively expensive, fueling runaway inflation.

“I think you're subtracting 10% to 20% from your GDP,” said Charlie Robertson, head of macro strategy at London-based FIM Partners. “Leaving the single currency is causing the Great Depression,” he said, adding that it would be the worst political mistake countries could make.

In light of these risks, the boards are approaching the monetary issue more carefully than their withdrawal from ECOWAS.

Two government officials from the countries told Reuters that the committee tasked with studying a new monetary union, although still planned, had not yet met.

Prime Minister Choguel Maiga of Mali – the only one of the three to have ever issued its own currency – has urged patience.

When Mali left WAEMU in 1962 after independence, its new currency was on par with the CFA franc, but when it returned to the union in 1984 it was worth only half as much.

To ensure lessons have been learned, Maiga says the committee needs time to evaluate all the implications before the country draws up plans for a new currency with its two neighbors.

“This is what I tell Malians,” Maiga told business leaders last month. “Of course you have this passion. You want it. But this is strategic.”

($1 = 604.0000 CFA francs)

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