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Misanet.com / IPS, 20 December - The introduction of Euro notes and coins 1 January spells a new future for a unique African currency tied to the Euro. The CFA-Franc, the currency of 14 African nations was linked to the Euro in a fixed exchange rate of 1 Euro to 655.957 CFA-Francs on 1 January 1999. The CFA (Communaute Financiere Africaine or the African Financial Community) encompasses Burkina Faso, Senegal, Guinea Bissau, Côte d'Ivoire, Togo, Benin, Equatorial Guinea, Gabon, Mali, Chad, the Central African Republic, Cameroon, the Congo, and the Comoro Islands. That linkage of the CFA with the Euro has prospered though both communities have radically different economic structures: The largely agricultural, underdeveloped countries of Western and Central Africa coming from a recent past of colonial exploitation found a working link with the highly industrialised countries of the European Union, many of them the former colonial powers. The monetary integration is expected to continue successfully. "The coming of the Euro is not an event that will modify the exchange rate of the CFA-Franc," says Charles Konan Banny, president of the African region's central banks. The linkage is rooted in a colonial past. The community, founded in 1939, originally provided the former French colonies in Africa, South East Asia and the Caribbean with a single currency pegged to the French franc. The Franc zone continued after independence for the colonies following a decision by the French monetary authorities to guarantee free convertibility of the CFA to the Franc. The guarantee was renewed with the entry of the French franc into the European Monetary Union on 1 January 1999. A spokesman for the Banque de France, the French central bank, says "this convertibility has provided the country members of the CFA with a stable currency, and helped create a climate favourable for foreign investment and trade. This is because "the pegged exchange rate reduces the risks associated with weak monetary units." The bank claims that the CFA countries have this way avoided the typical monetary miseries of Third World countries such as the existence of parallel markets for foreign currencies, rationing of currency exchange, and the violations of currency laws. "The CFA has also controlled inflation, thanks to the linkage to the French Franc and to the Euro," the central bank claims. The French central bank now foresees an increase in inter-regional trade with the coming of the Euro currency. The EU is already the main trade partner of the CFA countries. Almost 70 per cent of all regional exports go to the EU. The region buys more than 60 per cent of foreign goods from Europe. To keep the fixed exchange rate, the 14 African countries must co-ordinate their monetary policy and obey strict budgetary and monetary rules. All international reserves of member countries are deposited at the three central banks in the region. But some development experts and economists see a dark side to this linkage. France controls the monetary policy of the CFA to ensure that given provisions are respected - but at a price. The 14 member countries must deposit at least 65 per cent of their foreign assets in accounts with the Banque de France. The linkage to a hard currency brings its own difficulties. "The controls are necessary to avoid monetary and budgetary blunders," says economist Philippe Fremeaux. "But the African economies are structurally weak, and the hard currency is a burden that degrades their competitiveness." Hard currency allows a country to buy foreign products at relatively low prices. But the high exchange rate makes national goods more expensive, and exports less competitive. The CFA countries are obliged to maintain "a high fixed exchange rate incompatible with the productivity of the regional economies and that weighs down their potential for economic growth," says Fremeaux. The CFA had experience of this in the early 1990s. The African governments refused for long to devaluate the CFA-Franc relative to the French franc, despite evident economic imbalances. "They did not want to give up their artificially high purchase power on the international market," Fremeaux says. But under the pressure of the International Monetary Fund, the CFA-Franc was devalued in 1994. The devaluation helped regional economies recover. Other development experts point out that the international valuation of the Euro itself is erratic, and this will affect the African countries' debt service. "Any devaluation of the Euro against the dollar will automatically increase the debt service of the CFA country members," says Gerhard Leithaeuser, a German economist who has worked several years for the United Nations Economic Commission for Africa. Leithaeuser believes the Euro may be devalued during the very first weeks of next year. These warnings notwithstanding, the CFA continues to serve as a model to other programmes for regional economic integration. A regional grouping following suit is the recently created Economic Community of West African States (ECOWAS). The six sub-Saharan English speaking African countries - Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone - that constitute ECOWAS have decided to put in place monetary institutions and policies similar to those in the CFA countries. ECOWAS plans a common currency and a single central bank by January 2003, and a monetary union with the CFA by January 2004. That would mean that 20 sub-Saharan African countries - 14 from the CFA and six of ECOWAS - would have in effect a single currency pegged to the Euro. That will bring its own strengths - and weaknesses - to much of Africa. By Julio Godoy,
IPS
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