ECONOMY-AFRICA: CFA Zone Trembles as the Euro Approaches

By IPS Correspondents Reprint | | Print |

IPS Correspondents

BRAZZAVILLE, May 6 1998 (IPS) - A mood of near panic has set in in the French-speaking African nations that share the CFA Franc as the countdown to the introduction of a common currency for the European Union (EU) goes into high gear.

By Jan. 1, 1999, 11 EU countries will adopt the Euro, which will co-exist with their national currencies until it eventually replaces them. Of particular concern to the Francophone African nations is the fact that the French franc (FF), to which the CFA is pegged, will disappear along with the others.

In early April, former French prime minister Pierre Mesmer had caused consternation in Francophone African capitals when he announced that the advent of the Euro would cause the CFA to suffer a second devaluation — it lost half of its value vis-a-vis the FF in January 1994.

The 1994 devaluation saw the CFA slide from 50 to 1 FF to 100 to 1 FF.

However, French Minister of Economic Affairs Dominique Strauss Khan had reassuring words for CFA Zone finance ministers when he met with them on Apr. 10 in Libreville, Gabon. There would not be any new devaluation of the CFA Franc after the French Franc gives way to the Euro, he said.

Some economists on the African continent think he has a point. Since the economies of most of the countries concerned have grown since 1994, they note, there is no justification for a second devaluation of the CFA.

But the fear that the currency will again lose some of its value has set in in CFA zone countries such as the Republic of Congo. Business people have begun taking precautions in Brazzaville. Last month, commercial banks, for example, registered a sudden spate of withdrawals by depositors, according to Jacques Ngakosso, head of external relations in the Bank of Agriculture, Industry and Commerce (CAIC) in the Congolese capital.

“The campaign for the Euro and its eventual implications for the CFA franc worries us already,” he told IPS in mid-April. “For a week now, we have noticed that our clients have been withdrawing funds at a faster rate and there has been an increased demand for hard currency by the same clients.”

Other bank officials feel that, despite the reassurances from Paris, the Euro could hurt CFA Zone banks more than the 1994 devaluation.

“The 1994 devaluation had surprised the clients and they had not had enough time to withdraw their savings so as to stock up on hard currencies,” says Gualbert Opoundzoukou, a member of the Audit Committee of the Union of Congolese Banks (UBC). Now, however, they will have more time to prepare and banks’ coffers could run dry, preventing them from financing economic operations, he predicts.

Most Congolese banks have just resumed operations after being destroyed and plundered during a civil war that lasted from June to October last, and they can ill afford the mass withdrawals.

With the banks unable to keep up with the demand for foreign currency, money changers along the main roads in Brazzaville’s city centre are doing brisk business, but even they have been running out of the most sought-after currencies, the U.S. dollar and the French franc.

“We’ve never had such a rush of clients,” says Mathias Kodia, a money-changer in the Congolese capital. “The currencies that are now available are the Belgian franc and the Zaire (from the Democratic Republic of Congo). Since the others are becoming scarce, we shall be forced to replenish our stock in Kinshasa.”

“On Thursday alone, I changed more than 3,000 dollars, and the others may have changed more than I,” added Kodia, who said, though, that he was worried Brazzaville might be flooded with counterfeit money.

The rush to acquire hard currency has everthing to do with the experience people went through when the CFA’s exchange rate plunged four years ago.

“In 1994, my savings were suddenly devalued by half,” says Hortense Mviri, a wholesaler who sells dried and salted fish. “This time around, I am more aware and I have to take my precautions since France has never kept its promises. My fish comes from Europe, mainly Denmark. I am not concerned with France’s beautiful promises.”

Not everyone is worried by the Euro. For example, Yassine Abdul Hussein, a Lebanese merchant based in Brazzaville, does not think it will hurt him. “The only thing I am afraid of is a devaluation of the CFA franc,” he says. “The arrival of the Euro will not have any impact on my business because I buy my goods in South Africa where everything costs less.

“I am sure that the Euro will make most CFA Zone businessmen look towards South Africa, and if that happens Europe will lose out.”

In the West African nation of Burkina Faso, people are convinced that a second devaluation of the CFA is inevitable.

Paul Dedoui, a journalist with ‘L’Observateur Paalga’, a Burkinabe daily appreciates the fact that Mesmer has sounded the alarm bells. “History,” he says, “may well prove Mesmer right. It’s inevitable that the CFA will be unpegged from the FF since the Euro will replace the European currencies in 2002. However, the impending devaluation will not be like the first one. It will be a de facto devaluation, not a formal one.”

In Ouagadougou, the Euro and its potential effects has been the number one topic of conversation in recent weeks, even though it has been facing stiff competition from the frequent power cuts and water shortages that have accompanied a severe drought this year.

Business appears to have slowed down and Tahirou Kabore, who sells embroidered West African robes in Ouagadougou thinks the reason for this is that “the rich have already stashed away their money in European banks”.

But Burkina’s Minister of Economic Affairs and Finance, Tertius Zongo, says he is prepared to bet that a new devaluation of the CFA is not in the offing. “There won’t be a second devaluation. I can bet my life on it,” he says.

“It’s not the French Central Bank but the French treasury that guarantees the CFA’s rate to the FF and the CFA is covered 100 percent by our gold reserves deposited at the French treasury, so there is no question of devaluation.”

In neighbouring Togo, the authorities are a bit more cautious since, in recent weeks, they have noticed a significant capital flight, which officials of the Central Bank of the West African States (BCEAO) have also observed.

“To avoid any loss of capital, the BCEAO has taken important measures, which now allow it to partially overcome the problem,” says economist Raymond Bamiab, who works at the International Bank for Africa in Togo (BIA-Togo).

“Monetary transfers abroad by our clients are strictly controlled so as to avert any capital flight through false payments on bogus invoices,” he explains. “To avoid all that we demand supporting documents.”

Unlike Togo and Congo, Cote d’Ivoire does not seems to have been affected by any unusual withdrawals, although there, too, economists have been recommending caution.

“The present debate is a geopolitical problem,” says economy lecturer Mamadou Koulibaly in Abidjan. “The future of the CFA Franc, whether it’s devalued or not, will depend on arrangements between France and its European partners. We have to be careful and remain alert.”

He charges that when the Euro comes on stream, it will be valued at about six FF or 600 CFA, which means that people in Africa will hardly be able to buy anything from Europe.

“How much, for example, are we going to pay for an average switch that costs 3,000 CFA today?” he says. “If its price goes up by three, four or six times, people won’t be able to buy the electrical equipment they need when building their houses. Another devaluation would throw us back nearly 600 years.”

What to do about all this is a question Congolese specialists have been asking themselves and they feel the answer lies with Africans taking their economic and financial future into their own hands.

Theophile Pale, an instructor in the Economics Faculty at the Marien Ngouabi University in Brazzaville, feels there should be less reliance on Paris. “We need to be careful,” he argues. “There may be a case for taking a lucid look at reality and thinking more deeply about all this. We have to be prepared for any eventuality.”

Quoting the French newspaper, ‘Le Monde’, he adds: “It might make sense for the countries of the Franc zone to pull out of their monetary tete-a-tete with France, even if it means that they will lose a bit of stability. Why continue to tag along behind a country even if it is an economic power? History is calling on us to evolve.”

Another Congolese economist, Jean Marie Ekassa-Kanga, accuses France of playing hide-and-seek with its former colonies, but he also doubts whether, even if it wanted, the European nation could keep on propping up the CFA franc for ever.

“Now, more than ever before, the creation of an African monetary union is on the cards,” he argues.