The CFA Franc, a currency used in 14 African nations, has garnered significant attention in recent weeks due to its mechanism, the countries involved in it, and the controversies it has stirred.
What is the CFA Franc?
The CFA Franc is a currency shared by two groups of African countries: those in:
- West Africa
- Central Africa
A map of where the CFA Franc is used as a currency in Africa.
* XOF is used in the green states
* XAF in used in the red states#CFAFranc pic.twitter.com/3M0ZYmYSvT— BitKE (@BitcoinKE) August 20, 2023
It has its roots in the colonial era when these nations were under European rule, primarily France. The abbreviation ‘CFA’ stands for ‘Coopération financière en Afrique’ or ‘Financial Cooperation in Africa.’ This currency comes in two variants:
1.) CFA Franc BCEAO (XOF)
It is regulated by the Banque Centrale des États de l’Afrique de l’Ouest (BCEAO), or the Central Bank of West African States. The XOF is used by countries in West Africa, including:
- Benin
- Burkina Faso
- Ivory Coast
- Guinea-Bissau
- Mali
- Niger
- Senegal
- Togo
2.) CFA Franc BEAC (XAF)
The currency is managed by the Banque des États de l’Afrique Centrale (BEAC), or the Bank of Central African States. XAF is employed by countries in Central Africa, such as:
- Cameroon
- Central African Republic
- Chad
- Republic of Congo
- Equatorial Guinea
- Gabon
Mechanism and How It Works
The CFA Franc operates within a fixed exchange rate system. This means that its value is pegged to another currency, originally the French Franc and later the Euro. Both CFA Francs have a fixed exchange rate (peg) to the euro: €1 = F.CFA 655.957 exactly. This mechanism is intended to provide stability and reduce currency fluctuations, making trade and investment more predictable.
The Controversies:
- Limited Monetary Autonomy: One of the key controversies is that the fixed exchange rate system limits the monetary autonomy of these African countries. They cannot adjust their exchange rates to address specific economic challenges, like high inflation or slow economic growth. Others disagree and argue that the CFA ‘helps stabilize the national currencies of Franc Zone member-countries and greatly facilitates the flow of exports and imports between France and the member-countries.’
- Deposits with the French Treasury: Another major point of contention is that these countries are required to deposit a portion of their foreign exchange reserves (50%) with the French Treasury. This rule raises concerns about financial sovereignty and whether it restricts these countries’ ability to fully control their monetary policies.
- Historical Baggage and Neo-colonialism: Critics argue that the CFA Franc’s historical ties to colonialism perpetuate a neo-colonial relationship between these African countries and France. The currency’s name and structure evoke a sense of dependence on former colonial powers, raising questions about their economic independence and national identity.
In 2019, several West African countries announced plans to introduce a new currency called ‘The Eco.’ It would still be pegged to the Euro but would eliminate the requirement to deposit reserves in France. This move aims to address some of the controversies but remains a subject of debate and negotiation.
The broader Economic Community of West African States (ECOWAS), which includes the members of UEMOA, plans to introduce its own common currency for its member states by 2027 for which they have also formally adopted the name Eco.
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