The core of the difficulties in maintaining and controlling such a monetary union has been the complicated relationship within ECOWAS between the formerly-French West African states who use the CFA franc (the Financial Community of Africa - Communauté financière d'Afrique – CFA franc) as their common currency and the non-francophone (except Guinea) states in the region who do not use the CFA franc. These eight CFA states are members of the customs and currency union, the West African Economic and Monetary Union ( Union économique et monétaire ouest-africaine) WAEMU which co-exists within the wider ECOWAS organisation. WAEMU represents seven francophone West African states (Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo) plus the lusophone Guinea-Bissau. This WAEMU was established by the Treaty of Dakar in 1994.

There are actually two separate CFA francs in circulation. The first is that of the West African Economic and Monetary Union (WAEMU). The second is that of the Central African Economic and Monetary Community (CEMAC) which comprises six Central African countries (Cameroon, Central African Republic, Chad,  Congo-Brazzaville, Equatorial Guinea and Gabon),

The other states within ECOWAS use their own currencies but have pledged to introduce a common currency within their own grouping, the West African Monetary Zone – WAMZ, by the end of this yea,r 2009. These states (Ghana, Guinea, Nigeria, Sierra Leone, the Gambia and soon Liberia) hope to introduce a new common currency, the ECO, to rival the CFA franc and, eventually to merge the ECO and the CFA franc into a single monetary unit for the region. The pace of these developments is very slow.

One of the primary problems in dealing with the CFA is that it is not within the purview or competence of African officials to regulate the value or changes in the CFA franc. This was the sole responsibility of the French Treasury officials, and now, the French officials seconded to the European Central Bank ( ECB). This is a result of an incomplete decolonisation by France of its former colonies in Africa. [i]

The French Legacy:

The creation and maintenance of the French domination of the francophone African economies is the product of a long period of French colonialism and the learned dependence of the African states. For most of francophone Africa there are only limited powers allocated to their central banks. These are economies whose vulnerability to an increasingly globalised economy expands daily. There can be no trade policy without reference to currency; there can be no investment without reference to reserves. The African politicians and parties elected to promote growth, reform, changes in trade and fiscal policies are made irrelevant except with the consent of the French Treasury which rations their funds. There are many who object to the continuation of this system. President Abdoulaye Wade of Senegal has stated this very clearly “The African people’s money stacked in France must be returned to Africa in order to benefit the economies of the BCEAO member states. One cannot have billions and billions placed on foreign stock markets and at the same time say that one is poor, and then go beg for money....” [ii]

This system of dependence is a direct result of the colonial policies of the French Government.  In the immediate post-war period after the signing of the Bretton Woods Agreement in July 1944 the French economy urgently needed to recover from the several disasters of the Second World War. To assist in this process it set up the first CFA amongst its African colonies to guarantee a captive market for its goods.

The principal decision which resulted from the Bretton Woods Agreement was the abandonment of the Gold Standard. In short, the new system gave a dominant place to the dollar. The other currencies saw their exchange rate indexed to the dollar. The reserves of the European central banks at that time consisted of currencies of dubious post-war value and gold which had been de-pegged from the fluctuations of the currency. For this reason France needed the currencies of its colonies to support its competitiveness with its American and British competitors. De Gaulle and his main economic advisor, Pierre Mendès France met with some African leaders and developed a Colonial Pact which would enshrine this is in a treaty (with both public and secret clauses).

“Following the devaluation of the French Franc, it was naturally expected that the currency which was also circulating in Francophone Africa would also be devalued. Instead, France decided to create a new currency for its African colonies on 26 December 1945...  The newly created CFA was however not devalued but overvalued. In deciding to overvalue the new currency, the CFA zone economies were effectively excluded from the international market as their products became too expensive on the competitive global market.

There remained only one market for the CFA zone, and that was France their colonial master. This enabled Metropolitan France to appropriate to itself the raw materials needed for its post-War and young industries. The colonies were tied hand and foot to serve Metropolitan France as other markets closed their doors to their expensive products. Thus through the new CFA currency, France was able to economically re-colonise its African colonies that had earlier been cut off from Paris as a result of the War.” [iii]

Decolonization south of the Sahara did not happen as de Gaulle had intended. He had wanted to create a Franco-African Community that stopped short of total independence. But, when Sekou Toure's Guinea voted "no" in the 1958 referendum on that Community, the idea was effectively dead. Guinea was severely punished because of its decision and the French soon had to proceed towards allowing the independence of its colonies but at the price of a strict continuing control over their economies. They agreed at independence to be bound by the Pacte Colonial.

The key to all this was the agreement signed between France and its newly-liberated African colonies which locked these colonies into the economic and military embrace of France. This Colonial Pact not only created the institution of the CFA franc, it created a legal mechanism under which France obtained a special place in the political and economic life of its colonies.

The Pacte Colonial Agreement enshrined a special preference for France in the political, commercial and defence processes in the African countries. On defence it agreed two types of continuing contact. The first was the open agreement on military co-operation or Technical Military Aid (AMT) agreements, which weren’t legally binding, and could be suspended according to the circumstances. They covered education, training of servicemen and African security forces. The second type, secret and binding, were defence agreements supervised and implemented by the French Ministry of Defence, which served as a legal basis for French interventions. These agreements allowed France to have predeployed troops in Africa; in other words, French army units present permanently and by rotation in bases and military facilities in Africa; run entirely by the French.

According to Annex II of the Defence Agreement signed between the governments of the French Republic, the Republic of Ivory Coast, the Republic of Dahomey and the Republic of Niger on 24 April 1961, France has priority in the acquisition of those "raw materials classified as strategic.” In fact, according to article 2 of the agreement, "the French Republic regularly informs the Republic of Ivory Coast (and the other two) of the policy that it intends to follow concerning strategic raw materials and products, taking into account the general needs of defence, the evolution of resources and the situation of the world market.”

According to article 3, "the Republic of Ivory Coast (and the other two) inform the French Republic of the policy they intend to follow concerning strategic raw materials and products and the measures that they propose to take to implement this policy.” And to conclude, article 5: "Concerning these same products, the Republic of Ivory Coast (and the two others) for defence needs, reserve them in priority for sale to the French Republic, after having satisfied the needs of internal consumption, and they will import what they need in priority from it.” The reciprocity between the signatories was not a bargain between equals, but reflected the actual dominance of the colonial power that had, in the case of these countries, organised "independence" a few months previously (in August 1960).

In summary, the colonial pact maintained the French control over the economies of the African states; it took possession of their foreign currency reserves; it controlled the strategic raw materials of the country; it stationed troops in the country with the right of free passage; it demanded that all military equipment be acquired from France; it took over the training of the police and army; it required that French businesses be allowed to maintain monopoly enterprises in key areas (water, electricity, ports, transport, energy, etc.).  France not only set limits on the imports of a range of items from outside the franc zone but also set minimum quantities of imports from France. These treaties are still in force and operational. [iv]

The WAEMU CFA franc is issued by the BCEAO (Banque Centrale des Etats de l’Afrique de l’Ouest). This currency was originally pegged at 100 CFA for each French franc but, after France joined the European Community’s Euro zone at a fixed rate of 6.65957 French francs to one Euro, the CFA rate to the Euro was fixed at CFA 665,957 to each Euro, maintaining the 100 to 1 ratio. It is important to note that it is the responsibility of the French Treasury to guarantee the convertibility of the CFA to the Euro.

The monetary policy governing such a diverse aggregation of countries is uncomplicated because it is, in fact, operated by the French Treasury, without reference to the central fiscal authorities of any of the WAEMU states. Under the terms of the agreement which set up these banks and the CFA the Central Bank of each African country is obliged to keep at least 65% of its foreign exchange reserves in an “operations account” held at the French Treasury, as well as another 20% to cover financial liabilities.

The CFA central banks also impose a cap on credit extended to each member country equivalent to 20% of that country’s public revenue in the preceding year. Even though the BCEAO has an overdraft facility with the French Treasury, the drawdowns on that overdraft facility are subject to the consent of the French Treasury. The final say is that of the French Treasury which has invested the foreign reserves of the African countries in its own name on the Paris Bourse.

The central banks of these 2 zones – the Central Bank of West African States (BCEAO) for WAEMU and the Bank of the Central African States (BEAC) for CEMAC – have supranational status. For each zone, the reserves of member states are pooled; members have no independent monetary policy and no possibility of undermining the central bank’s independence or monetising public deficits.

This fixed exchange rate regime draws its credibility from monetary agreements with France that, via the Treasury, guarantee the convertibility of the CFA franc and provide the central banks an overdraft facility (compte d’opération) to meet liquidity needs. As a counterparty to this guarantee, 50% of their reserves must be placed within the French Treasury in the compte d’opération. The reserves must amount at least to 20% of central bank short-term liabilities. If the reserves are below this level (or if the compte d’opération is in debit) for more than one quarter, the central banks must take corrective measures (interest rate increases, credit rationing, and seizure of foreign exchange available in the zone). [v]

In short, more than 80% of the foreign reserves of these African countries are deposited in the “operations accounts” controlled by the French Treasury. The two CFA banks are African in name, but have no monetary policies of their own. The countries themselves do not know, nor are they told, how much of the pool of foreign reserves held by the French Treasury belongs to them as a group or individually. The earnings of the investment of these funds in the French Treasury pool are supposed to be added to the pool but no accounting is given to either the banks or the countries of the details of any such changes. The limited group of high officials in  the French Treasury who have knowledge of the amounts in the “operations accounts”, where these funds are invested; whether there is a profit on these investments; are prohibited from disclosing any of this information to the CFA banks or the central banks of the African states.

Prof Nicholas Agbohou, author of Le Franc CFA et l'Euro Contre l'Afrique, and an ardent critic of the CFA-French relationship stated the dilemma clearly in a recent interview” The economy of any given country is managed by its central bank or in the case of a regional community such as the Economic and Monetary Union of West African Stares (UEMOA), their central hank, the BCEAO, manages the economies of the member states. A central bank, in turn, is managed by an administrative council that determines the running of the bank. A central bank is therefore an important component of a country's economy as it is the principal bank of any country. Commercial banks give credit to individuals or institutions. The interest rate on credit is increased or lowered in conformity with the socio-economic development objectives of the country. For instance, if the central bank wishes to inject credit into the economy to favour the growth of entrepreneurship, the interest rate is lowered.

The CFA zone central banks' administrative councils are composed of: 16 administrators, 2 of them French in the BCEAO; 13 administrators, 3 of them French in the BEAC; and 8 administrators, 4 of them French in the BCC.

Questioner: But the French are in a minority here?

Agbohou: Yes, but in reality the paradox is that it is their reduced number that poses problems in as far as the less visible the French in these administrative councils, the more they are able to give the naive Africans the illusion that they (the Africans) are the masters in control due to their numerical strength.

The sad truth is that this French minority has "blocking powers", in other words the French enjoy veto powers on any major decisions taken by the banks' administrative councils.

For a decision to be valid at the BEAC, it must be unanimously approved by all the members of the administrative council. At the Comoros Central Bank or BCC, at least five of the eight administrators must approve a decision. At all times, no decision can be approved without the French. France is, therefore, in a position to block any major decisions taken by these banks. So if a decision favoured by the Comorian representatives at the BCC does not tally with French interests, the French administrators have the power to block it.  The way these central banks function, therefore, legalise and perpetuate the direct intervention of France in the vertebral column of the CFA zone economies. Even to appoint the governor of the BEAC for instance, the candidacy is proposed by Gabon, but it must be approved by Paris which seeks to ensure that the governor is malleable and ready to dance to French tunes to the detriment of African economic interests.” [vi]

This makes it impossible for African members to regulate their own monetary policies. The most inefficient and wasteful countries are able to use the foreign reserves of the more prudent countries without any meaningful intervention by the wealthier and more successful countries.

Perhaps the best description of these anomalies can be found in the writings of the Cameroonian economist Célestin Monga”. [vii] The crux of the matter comes down to the plain, unvarnished truth that the much praised advantages of the Franc zone primarily buttress a captive market tailor made to suit certain French businessmen installed in Africa, which concomitantly serves the transactions of corrupt African elites who regularly journey to France to augment their personal deposits in Parisian banks. While they are over here, why not offer themselves Pierre Cardin suits and shopping sprees without worrying about exchange rates? As for some farsighted French or African businessmen who would be interested in creating small businesses or developing industries on a durable basis, they are more concerned by the structural problem of mechanically, deteriorating profitability which persists when the currency of a weak economy is tied to the fixed exchange rate of an overly strong currency such as the euro.

What interests job creators aren’t the modest inflation rate conjured up by the advocates of the Franc CFA but the opportunities for commercialising their production. From this standpoint, the monetary policies of black African countries adhering to the Franc zone continue to suffer from a rash of self-inflicted masochism.” [viii]

The Challenge of the CFA

The major problem with the CFA franc is that because of its pegging to a fixed rate to the Euro its value reflects the successes or failures of European monetary policies, not African realities. For the last few years the rising value of the Euro relative to the US dollar has made African primary products much less competitive than the unfettered currency might have achieved. As Monga continues, “ At a time when the world’s economy is slowing down, when the crisis of the international financial system and the stock markets threaten developing countries with recession, it is hard to understand why Francophone African countries, which rely almost exclusively on exports for their development still accept monetary arrangements that leave them no room for manoeuvre as far as external competition or internal economic policy is concerned. To make matters worse, the imports of these countries are usually billed in euros whereas exports are paid back in dollars. A strong euro against a weak dollar not only overrates the franc CFA (making for a loss of price competitiveness for export products on international markets), but also means a loss of export volume and therefore tax revenues.” [ix]

This is particularly true for the range of African commodity prices. In the Standard and Chartered Bank Global Focus [x] this point was stated succinctly, “Commodities account for over 80% of the CFA franc zone’s exports and, given their impact on the balance of payments, budgets, and growth, have a strong influence on the policy stance toward the peg. In 1994, depressed commodity prices led to macroeconomic imbalances and contributed to the devaluation. Commodity prices, particularly oil, were booming for much of 2008, pushing up international reserves and leading to a rapid improvement in the barometer. The picture differed between WAEMU and CEMAC, however. Rising oil prices negatively impacted WAEMU countries (net oil importers) but strongly benefited CEMAC countries (net oil exporters). Furthermore, oil prices increased faster than prices of cocoa, gold, and cotton, which are key WAEMU exports. The cotton sector is of high importance to some WAEMU countries (Benin, Burkina Faso, and Mali) in terms of export receipts and employment – it is estimated that 15-20 million people in WAEMU depend on the sector for their livelihoods. Cotton prices did not boom to the same extent as other commodity prices, rising only modestly since 2006. (They are even more depressed in local-currency terms.) [xi]

The vulnerability of the WAEMU to the pressures of the high Euro-dollar spread were not felt by the other African states in ECOWAS, especially Nigeria. In Nigeria the windfall profits of $147 a barrel oil greatly enhanced the economic health of the country and its acquisition of substantial monetary reserves. As an important oil and gas producing state its fortunes burgeoned. The high prices paid for cocoa produced increasing income for Ghana and Guinea benefitted from the rising price of bauxite. These commodities are principally traded in dollars. More importantly, these two states were not bound by the restrictions of the Pacte Colonial and could purchase their imports outside the European market (France) and thus had a much lower vulnerability to a rising Euro.

Now, in the wake of the global credit crunch there are more worrying changes. The principal worry is the state of the French economy and the pressures on a Euro to cope with the vast monetary and fiscal divergences among the 27 states. The ECB has lowered interest rates but seems incapable of pursuing a monetary policy which will resolve the differences among the several European states. The French government has recently allocated 428 billion euros to stimulate growth in the French economy, a large part of which will be directed at infrastructural projects. This does not leave a lot of cash to assist its African dependencies. The declining value of the African reserves, bound up in investments in a falling French stock market has diminished the ardour for French subsidies of development projects in such economic basket cases as Niger, Mali, Burkina Faso and others. France has shown itself unwilling to continue to finance the stationing in Africa of so many troops, including those wearing the blue berets of the United Nations.  Even for those states which have discovered oil and gas reserves the falling price of oil has threatened many budgetary plans.

In the Anglophone countries of ECOWAS there is also a marked effect of the global crisis on the local economies. In Nigeria, long the powerhouse of the West African economy there has been a precipitous decline in the value of the Naira. The continuing crisis in the Niger Delta and the threat of the restriction of oil output by the rebels has increased the lack of confidence in the long-term stability of the Nigerian economy. The Christmas coup in Guinea, and the subsequent suspension of the country from ECOWAS, makes it much more problematic for a rapid restoration of income to the country from the vast mineral wealth which had been flowing to the recently deceased president’s coffers.   In short, there is little about the WAMZ states that would lead investors to expect growth, stability or a common economic policy. There appears to be little chance of an agreement on a common currency by the end of 2009. Still less is there a chance of uniting the WAMZ currencies with the CFA.

In a recent address, the Deputy Governor of The Bank of Ghana, Mr Van Lare Doso, said that even if the ECO was introduced it would take Ghana three years or more to make it legal tender. [xii]

There is little expectation that the current economic climate will bring windfall benefits to West Africa. The fundamental reason for this is not the state of the world’s economy nor the piratical domination of the CFA zone by the French; although they play a part. The reason why common markets, customs unions or multinational groups survive and thrive is because the constituent states trade with each other. The reasoning behind the formation of the European Economic Community; the EFTA and similar variants of these models is that the European states were trading heavily with each other. The uneconomic interference of customs duties, tariffs, currency restrictions, if scrapped, would be beneficial to all the partners. Despite the parallel battle over Federalism within the EU it has been clear that there have been positive and sustained gains for most parties from the creation of the union. Indeed it has succeeded in attracting ever more candidates to the union.

This is not true in Africa. There is very little intra-African trade; indeed most of that is the result of land-locked countries having to rely on neighbours for transit business. Intra-African trade, even in foodstuffs, is a small (around 5%) of national trade for most countries in ECOWAS. Some of this is due to producing raw materials which are exported to countries which are equipped to process them; the lack of a large and sophisticated domestic market for semi-finished goods which can be further processed; the lack of efficient storage facilities and, most importantly, the woeful lack of intra-African transport facilities.

Africa is a vast continent of immense resources but with very poorly developed transport integration with other centres of commerce. This lack of integration with the rest of the trading world is a heavy burden on African exporters and has led to a situation in which an enormous percentage of the prices realised by African exports in the world marketplace is paid for in transport costs. In the developed world these transport and insurance costs make up about 5.5%-5.8% of the delivered price. In some countries in Africa the cost of transport and insurance can make up to almost 80% of the cost of goods or products delivered to the world markets. Moreover, absent a developed intra-African air or sea service, this 80% of the market price for African products is paid to foreign companies in the developed world; and paid in U.S. dollars. This burden of external payments has a marked effect on currency price pressures as well.

To illustrate this one can work backwards. If the market price of a good is determined by the price at the destination than that price is the CIF price. If the transport and insurance costs account for such a high percentage of this price, it then follows that to be competitive; the African exporter must reduce his FOB price to reflect this differential. For example, if manganese ore sells at $250 per ton CIF Western Europe and transport costs of this manganese amount to $60 per metric ton, then the maximum FOB price of the manganese ore FOB Africa cannot be more than $190 per metric ton. The price of transport and, most frequently insurance, is not controlled by the African exporter. He is at the mercy of the shippers for whom transport rates are escalating.

Another important aspect of Africa’s dilemma is that the transport patterns which have emerged as a result of the outsourcing of international transport has been the continuation of links between African countries and the traditional colonial markets; e.g. Anglophone Africa to Great Britain; Francophone Africa to France; Lusophone Africa to Portugal, etc. North-South traffic is the most frequent African transport route; East-West Africa is almost unknown. Western Europe still takes about 50% of Africa’s exports. With the growth of major petroleum and gas exports from Africa since 1992 this figure of 50% is, in itself, misleading as these high value exports mask a concomitant decline in the value of African non-hydrocarbon exports. These trade patterns have led to ludicrous anomalies. Fresh produce from Southern Africa is shipped to Europe and then trans-shipped again to West Africa. Tobaccos often follow this routing. The hungry displaced civilians in Africa’s regional wars in Liberia, Sierra Leone, Angola and the D.R. Congo were forced to import expensive food from Europe via the World Food Program while African exporters of food had to send their products to Europe at low prices because of the transport nexus.

The point is that monetary union must reflect a pre-existing economic interdependence. Without that it is a futile exercise. There is no advanced level of economic interdependence in West Africa, partly due to the nature of African export markets and partly because of the distortion in the ability of francophone countries to act in their own interests because of the domination of France. Whatever the reason, there is little convergence among the West African economies so there will likely be no convergence in their monetary policies.

As a result it is unlikely that and ECO will be circulating within the WAMZ in January 2010. However, there is every likelihood that the CFA francs will continue their distortions of the African economies and very little is likely to change for the better.