Even if its first phase is likely to be heavier on symbolism than creating an overnight shift in economic policy, the creation of a new West African currency is a major step forward, with ramifications for populations and business across the region, write African Energy correspondents in Abidjan, Casablanca and Brazzaville
The move by the eight-member Union Economique et Monétaire Ouest Africaine (Uemoa) to end its 55-year-old currency union based on the French-guaranteed CFA franc will have a range of consequences for businesses and political relations. The new eco currency, whose creation was formally announced in Abidjan on 21 December by President Alassane Dramane Ouattara and the visiting French president, Emmanuel Macron, includes some major changes, notably ending control over franc zone institutions by the Banque de France and reducing the guarantee of the French state. But it does not yet represent an economic revolution: the eco’s introduction in the Uemoa will be subject to a steady transition, intended to avoid upsets in a region that has made considerable economic progress in the past decade, but remains prone to security concerns and potentially volatile populations.
Ouattara has led in crafting the Uemoa’s new common currency, whose introduction has been welcomed across a region where French influence is often resented. This should add to the president’s lustre as Côte d’Ivoire enters what could be a very difficult presidential election year.
Other countries are expected to join the eco at a later stage: currency union has been a longstanding goal for the 15-member Economic Community of West African States (Ecowas), which means Ghana, regional giant Nigeria and other Anglophones have been following developments with more than the usual interest.
The Central African CFA franc bloc – comprising Cameroon, Central African Republic, Chad, Republic of Congo (Brazzaville), Equatorial Guinea and Gabon – lags behind its Uemoa counterparts on most economic and governance indicators. This led many governments and analysts to suggest the Communauté Economique des Etats de l’Afrique Centrale (Cemac) should decouple from the Uemoa zone and remain with the CFA franc in its current form. However, after the Ouattara-Macron announcement there are signs that Cemac countries may also move to adopt the eco – if only at a symbolic level. Central African leaders have already asked the Cemac central bank, the Banque des Etats de l’Afrique Centrale, to investigate options.
New look currency
In some respects, transition to the eco may be more dramatic from a symbolic perspective for a currency which began life as the ‘franc des colonies françaises d’Afrique’. An analyst in the region commented that “the eco idea has been, in part, driven by growing grassroots political pressure, particularly among the youthful population”. The new currency’s creation will underline the fact that, 50 years after France’s West and Central African colonies gained independence, they are finally free from hands-on control from Paris.
Economic changes are likely to be less dramatic. Initially the eco will retain a fixed parity against the euro, guaranteed by the French treasury. Down the line, the eco’s architects are looking for it to float freely, with its value calculated from a trade-weighted basket of major currencies, led by the euro and dollar, but also including the renminbi and other trading partners’ currencies.
However, eco-zone members will no longer be required to deposit 50% of their foreign exchange reserves at the Banque de France. Neither will French officials sit on the boards of the Banque Centrale des Etats de l’Afrique de l’Ouest or other Uemoa institutions. As time passes, institutional arrangements are likely to change, as Anglophone Ecowas countries led by Nigeria and Ghana join the project, along with countries like Guinea and Mauritania which do not use the CFA franc and feel the early stage eco resembles it too closely.
Central Africa considers reform
The Central African Cemac economies are generally neither as advanced, nor in several cases as politically stable, as the West African Uemoa economies. However, as in the Uemoa zone, there is pressure for reform and the region’s authoritarian leaders may see the eco’s arrival as a rare chance to gain some popularity points. At a Cemac summit in Yaoundé on 22 November, leaders announced that they too wanted reform. Chad’s President Idriss Déby Itno went so far as to say that Cemac would abandon the CFA in favour of a new common monetary framework – the region’s oil-dependent economies have long been more closely aligned to the dollar than the euro.
But not all Cemac leaders, including Cameroon’s President Paul Biya, are as enthusiastic. As so often, Central Africa is likely to move more slowly in reforming its governance and business practices (AE 384/20, 369/21). Levels of public debt are much higher in Cemac than in the Uemoa zone, while institutional capacity is lower. Oil-dependent states such as Chad, Equatorial Guinea, Gabon and Congo are still recovering from the 2014 price slump. The zone’s financial weakness has previously led international economists and policy-makers – including former IMF managing director Christine Lagarde, now heading the European Central Bank – to suggest privately that the Central African CFA franc should be devalued.
The region’s major institutional shortfalls became all too apparent last year when reforms to payments and other procedures introduced across Cemac by the BEAC to give central authorities more control over the allocation of scarce foreign reserves for transfer abroad and over “economic agents and banks” led to an unexpected credit crunch. The regional central bank was unable to process transactions at a workable speed (AE 401/17). Efforts have been made to overcome problems and accelerate payments, but many problems remain.
The introduction of new rules has caused some, less generalised problems in the Uemoa zone. A notable example came to light last year, when Canadian Natural Resources (CNR) announced it was postponing an infill drilling programme to expand production from the Espoir field on Block CI-26 offshore Côte d’Ivoire. The Calgary-based operator said this had been “cancelled until such time as foreign exchange practices can be clarified” (AE 399/1), referring to the Ivorian government’s decision to replace the US dollar with the CFA franc for financial transactions involving foreign entities, in line with an African Union directive that member states should use their local currency in international transactions.
Production from the Baobab and Espoir fields continues to provide crude oil flows for CNR, but there is no mention yet that the dispute that postponed the new drilling programme is over.