The Franc Zone
and its bigger, younger brother
The turbulent past of the Franc Zone’s members and the economic differences between them have not succeeded in breaking up the Franc Zone, a group of 14 central and west African countries using the two CFA franc currencies linked to the euro. In fact, the monetary union has survived for more than 65 years despite a lack of economic tools and know-how.
In comparison, the euro is still a young currency but, as financial analysts do not exclude a second round of economic downturn driven by renewed sovereign debt crisis fears, the subsistence of the Euro Zone is again being questioned. If we take the Franc Zone as a reference, the end of the Euro Zone might not be as near as they think…
How the CFA franc was born
In 1945 a single currency, the CFA franc (franc of the French Community of Africa), was introduced in 18 French African colonies, creating a monetary union, the Franc Zone. Today there are 14 African member countries, divided over two different zones, the CAEMC (Central African Economic and Monetary Community) and the WAEMU (West African Economic and Monetary Union). The economic performance of both sub zones is monitored by two central banks, the BEAC (Bank of the Central African States) and the BCEAO (Central Bank of the West African States) respectively.
When the euro was introduced in financial markets, the CFA franc traded its fixed parity to the French franc for a peg to the euro. The French Treasury was, and still is, supporting the fixed parity, whereby 1 euro is the equivalent of 655,957 CFA francs, to guarantee the convertibility of the African currency. An interesting fact is that the CFA franc was devaluated by 50% in 1994, an aggressive, but effective, measure to stimulate economic growth in the member countries.
Looking at the economical differences between both CFA franc zones and the member countries, it is prominent that the CAEMC is oil dependent, in that oil accounts for more than 60% of the zone’s total exports. In the WAEMU oil is only 20% of total exports. Most of the export in this zone consists of agricultural products such as cocoa and cotton. Cameroon is the biggest country in the CAEMC, producing more than 30% of the GDP, and Ivory Coast accounts for more than 30% of the GDP in the WAEMU.A“LINEA Monetary policy in western and central Africa
The appreciating euro is pressuring WAEMU growth much more than growth in the CAEMC. WAEMU export is much more euro-dependent and the zone loses competitiveness when the euro strengthens. On the other hand, when the dollar depreciates, the negative effect of the weaker dollar is often compensated by higher oil prices.
As agricultural products and oil do not tend to follow the same price evolution in the market, executing an efficient and consistent monetary policy for both sub zones is quite a challenge. A side note to this is that population in the WAEMU is twice as high as population in the CAEMC, while the total average income per capita is only half as high. This is caused by agricultural prices that are often much more pressured than oil prices.
Surviving severe crises
Since the Franc Zone was created, many of its members have been through severe public debt issues and long periods of crisis. There was the Cameroonian economic crisis during the eighties and the most recent example is the civil war in Ivory Coast, which should have come to an end when Laurent Gbagbo was arrested in April 2011. However, the ongoing issues in the country could easily create further economical problems in the WAEMU.
Today, more than 40% of the worlds cocoa crop is harvested in Ivory Coast, but the constant turmoil and political risk could push multinationals to start diversifying. This could result in additional investments in other cocoa producing countries and might change the cocoa market and the dominant market share of Ivory Coast permanently. It was already reported that Cameroon’s cocoa export is hitting new highs as a result of the crisis in Ivory Coast.
In contrast to the longevity of the Franc Zone, there are other examples of monetary unions that haven’t stood the test of time, such as the Scandinavian Monetary Union and the Latin Monetary Union, which both ended in 1914, when the gold coinage was suspended due to World War I.