Friday, March 20, 2015

The French Connection

The uncomfortable reality for the 154-million citizens of Francophone Africa is that five decades after independence, France still calls the economic shots. Eager to formalise its ties with its former colonies, France left behind something tangible when it vacated Africa during the wave of independence in the 1950s and 1960s: the CFA franc. Algeria, Guinea, Morocco and Tunisia exited the CFA zone shortly after independence.

In 1994 France devalued the CFA franc 50%, a hugely unpopular decision that led to a sharp increase in the cost of living and widespread unrest in Dakar, Senegal’s capital. The consequences of such a move was soaring inflation, a liquidity crisis and a dramatic rise in the cost of imports.

The CFA franc was created in 1945, ostensibly as a noble gesture to protect France’s African colonies from a devaluation of the French franc. Participating countries were required to deposit most of their foreign currency reserves with the French Treasury, which in turn dictated monetary policy and mandated when and how governments could access the money. The currency was pegged to the French franc, with France alone able to determine the exchange rate. The arrangement remains much the same 70 years later. Technically, two separate CFA francs are in circulation, each with its own central bank, in central and West Africa.

The CFA zone members must "pool together a minimum of 65% of their international reserves, corresponding to 20% of the monetary base of each central bank, into an operations account at the French Treasury". By depositing such a hefty chunk of their foreign reserves into a French-managed account, participating countries effectively lose control over their monetary policy. CFA members cannot use these funds as collateral to obtain credit because the reserves are held in the name of France. With French representatives on the boards of both CFA central banks, they are almost entirely dependent on French approval to set their own interest rates, or to control the amount of money within their economies — a basic policy tool for governments.

"The CFA franc arrangements keep the western African countries involved in the same economic shape as in colonial times. They provide raw materials to France and import all their manufactured goods. The convertibility of the CFA franc and its free transferability, combined with high interest and exchange rates, keep the franc zone countries in a state of structural deficits that render any development policies irrelevant," says Sanou Mbaye, a Senegalese development consultant and a former senior official at the African Development Bank.

Some argue that the CFA zone offers low inflation and a stable exchange rate, which in theory should encourage trade and foreign investment, says Canac.

"Unfortunately, those benefits seem to be more illusory than real. The CFA francs are overvalued and thus hinder exports while making imports cheaper (benefiting the African elite).... Although this does not necessarily prove that membership in the CFA is responsible for holding those countries back, it suggests at best that it does not help," explained Pierre Canac, an expert. "This dependence of the CFA countries ensures that France remains influential in this part of Africa. The African countries are more likely to support France, allow it to maintain a military presence, and confer some prestige to France. For France the political gains are worth the small economic costs."

Supporters of the CFA franc arrangement contend that it safeguards member countries against irresponsible governments that juggle interest rates or print money. With French backing and management, the CFA franc is unlikely to follow the Zimbabwean dollar whose value eroded after political turmoil and intense hyperinflation.

But France reaps untold economic benefits, says political analyst Gary Busch: the CFA arrangement is "the biggest Ponzi scheme you’ve ever seen". He claims the operations accounts have never been properly reckoned. In addition, these reserves have been invested in the Paris bourse with the French Treasury pocketing any profits.  Busch alleges that during the 2008-09 financial crisis, the funds in the operations accounts were pledged against the huge loans made to failing eurozone countries, such as Greece and Italy. The foreign reserves of some of the world’s poorest countries were risked to protect European states from bankruptcy.

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