“6 Central African Nations” for CFA franc using ISO symbol currency ‘XAF’ include: Cameroon, Congo, Central African Republic, Equatorial Guinea, Gabon, Chad. The CFA franc currency in circulation for XAF countries is known as the ‘Cooperation Financiere Africaine franc’.
“8 West African Countries” for CFA franc using ISO symbol currency ‘XOF’ include: Ivory Coast, Senegal, Burkina Faso, Mali, Niger, Benin, Guinea-Bissau, Togo. The CFA franc currency in circulation for XOF countries is the ‘Communaute` Financiere Africaine franc’.
The CFA franc, also known as the French-African franc has provided currency stability to some of the most vulnerable small economies in the world today. Population totals include 33.5 million for the XAF currency zone and 76.5 million for XOF.
POLITICS: in the 1940’s, France created the CFA franc common currency zone as a vehicle to control several of its colonies within Central & West Africa. There has been at times elements of political risk within some CFA countries including the Ivory Coast with a high country risk profile, Central African Republic & Equatorial Guinea with failed coup attempts, Guinea-Bissau with a bloodless military coup in September 2003, Chad with a history of civil divisions, etc.
ECONOMY: most of the countries have very small economies with the relative exception of Cameroon within XAF at $27 billion USD (2002) and the politically unstable Ivory Coast for XOF at $24 billion USD (2002) as measured by purchasing power parity. The exchange link to the euro has provided price stability to both CFA currency zones although at a cost of higher unemployment & high real interest rates. The CFA franc devaluation in 1994 coupled with structural reforms has helped to stimulate consistent GDP growth within the two CFA franc zones resulting in a lowering of fiscal & current account deficits and disinflation. Agriculture consists the economic make-up of the majority of the countries within both CFA franc zones although the discovery of significant oil deposits in Chad is creating excitement.
Economic Statistics
XAF total GDP stands at $54 billion USD (2002) as measured by purchasing power parity while corresponding GDP for XOF currency zone amounting to $75 billion USD.
GDP growth rates have overall been quite positive during 2001-02. Annualized inflation rates for XAF currency zone for 2002 at 4 percent approximately while XOF at 3 percent. Inflation rates were much higher 10 years ago with Chad at the time recording 42 percent annualized inflation rate. Togo has recently recorded modest deflation of 0.5 percent. XOF currency member Senegal recorded inflation in 1994 at 112.7 percent, conversely, this figure today has been reduced to 3 percent annually.
POSITIVE: commodities rich in some member countries with diamonds, gold, uranium, oil & natural gas, etc., an improvement in macro-economic variables. CONCERN: infrastructure deficiencies, political instability in regions, illegal oil production within Chad, reliance on trade taxes for budgetary revenue, high tariff rates.
BANKING SYSTEM: CFA common zone has provided the need for one central bank for the XAF and another central bank for the XOF currency zones instead of 14, thus simplifying monetary policy for the entire currency zone. For XOF countries, West African Economic and Monetary Union (WAEMU) has a common central bank, Central Bank of West African States (BCEAO). Conversely, for XAF countries, Central African Economic and Monetary Union (CEMAC), common central bank, Bank of Central African States (BEAC). Capital markets within the banking system are fragile and thinly developed although a common central bank has provided for tight fiscal management to ensure currency stability for the CFA franc and thus discouraging politicians from recklessly printing money as has been the case in Ghana.
REGIONAL ANALYSIS: Africa, CFA common market
The implementation of WAEMU in 1944 and CEMAC were designed with a goal of developing a competitive common market for these 14 nations by eliminating obstacles to trade while achieving the full benefits of globalization thus minimizing marginalization risk. The creation of the common market makes sense for these small countries. For comparison, the 2 CFA franc currency zones represent 18 percent of African GDP (2002). Finance ministers within the common currency zone back in 1999 agreed to some interesting general economic concepts including a goal of reaching inflation at 2 percent, foreign & domestic debt ceiling at 60 pecent of GDP, government wages at maximum 30 percent of total government revenues. Current challenges include inadequate savings, low investment in many CFA member countries, large number of government employees, skilled labour shortages which discourages FDI.
KNOWLEDGE: Divergence of the 2 CFA franc currency zones?<
Overall, the use of the CFA common currency zone has been quite successful as it has helped to ease trade within the CFA franc zone. The key strength for this exchange stability is the high soundness of the hard anchor currency, the Euroland euro. This exchange peg has many advantages as it has provided currency stability to the CFA zone, provided greater growth and lowered inflation. Conversely, the disadvantages include loss of national sovereignty, both exchange & interest rate manouverability to each country.
The XAF currency zone is oil producing with energy wealth present in Equatorial Guinea, Central African Republic (natural gas as well), Gabon and large scale oil development within Chad on the horizon. The oil boom within Equatorial Guinea began in 1996 with the pumping of oil resulting in national GDP growing over 50 percent. The big story is Chad which is a member of the XAF CFA franc zone. The discovery of oil will ultimately make this small country quite wealthy, Chad’s oil wealth is estimated at $40 billion USD. To date, $3.7 billion USD has been ear marked for capital development at oil fields located at Doba, Chad. Current Chad oil production is at over 100,000 bpd rising to 250,000 bpd. France with vast oil interests in Chad realizes Chad’s enormous untapped oil reserve potential. Chad and XAF currency zone will be flush with hard currency from abroad from the sale of oil as a $2.2 billion USD pipeline via Cameroon to sea ports on the coast is now in operation. Cameroon itself will be a major beneficiary of this oil wealth via oil transshipment revenues. The XOF currency zone has relatively no commerical oil interests and minimal mining in play, mostly an agricultural economy.
Divergence of the 2 CFA franc zones? Yes, perhaps over time but not in the short to medium time frame. Regional disparities are evident, a rising wealthier XAF CFA franc zone maybe less prone to future devalution risk unlike XOF countries. This may lead to the break up of a CFA franc traded at par with one another, in time, XAF zone may indeed be the stronger currency zone. The risk profile to XAF zone is the potential for corruption with realization oil wealth which may lead to squandering and misuse of monies.
CURRENCY: CFA franc, ISO symbol ‘XAF’, ‘XOF’, Communaute Financiere Africaine franc for XOF countries, Cooperation Financiere Africaine franc fro XAF countries, CFA franc, French-African franc. The CFA (CFAF) franc is pegged to Euroland euro ‘EUR’, the hard currency anchor that has provided the backbone support for the CFA franc. Both the XAF and XOF CFA francs are at par with one another. At time of review on May 18, 2004, the CFA franc had an exchange value of 548.0796 CFAF to 1 USD and/or 655.9571 CFAF to 1 EUR. Tiny African country Comoros has its national currency, the Comoron franc KMF linked to the CFA currency zone.
CURRENCY HISTORY: inception for the CFA franc occurred on December 26, 1945 at an exchange valuation of 1 CFAF to 1.7 French Franc ‘FF’. On October 17, 1948, the CFAF was devalued to 1 CFAF to 2 FF. In 1958, a new FF at a new exchange value of
1 FF to 50 CFAF was then implemented under a currency board arrangement. On January 12, 1994, the CFA franc was devalued and re-pegged to 100 CFAF to 1 FF. During this time, the French treasury guaranteed the CFA value to the FF as the CFA franc was covered 100 percent by gold reserves deposited at the French treasury. In January 1999 with the launch of the Euroland euro, the CFA franc was then pegged to the EUR. Recent historical exchange valuations for the CFA franc include: December 1998 at 559.67 CFAF to 1 USD, May 2000 at 728.56, September 2003 at 582.32, January 2004 at 519.57, April 2004 at 547.39. In relation to the Euroland euro, historical exchange quotes include: December 1998 at 658.24 CFAF to 1 EUR, February 1999 at 655.96 and April 2004 at 655.97.
CURRENCY FORECAST: exchange pressure is quite possible to the CFA franc’s direct peg to the appreciating Euroland euro as the CFAF is vulnerable. With the EUR experiencing a significant appreciation over the last 2 years and further appreciation is likely, the CFA franc may have to be devalued or re-pegged at a higher value to maintain the CFA franc currency zone competitiveness. A 10 to 15 percent devaluation or re-pegging to the Euroland euro is quite possible to a new possible trading level of 750 CFAF to 1 EUR. Other commodities including uranium and gold may see greater economic importance in the years ahead for CFA franc countries with the upcoming bull market in commodities particularly from countries such as Japan eyeing uranium interests in West Africa, the production and export of these commodities will provide for further hard currency earnings to the CFA franc currency zone.
UPDATED: May 18, 2004
