.jpg)
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.
No comments:
Post a Comment