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The dawn of an African financial union

Eight countries in West Africa recently announced their collective decision to adopt an indigenous new currency. In doing this, not only will they achieve more autonomy from a former colonial overlord, but also potentially cement their regional union into an engine of prosperity. The plan has been more than two decades in the making. Adopting a new currency is not an easy decision. If this move succeeds it could well become an economic role model for the rest of the continent.

The West African CFA franc (currency code XOF) has been the currency of Ivory Coast, Niger, Benin, Burkina Faso, Guinea-Bissau, Mali, Senegal and Togo. Most of these are former French colonies. CFA stands for Communauté Financière d'Afrique (Financial Community of Africa). The CFA franc was introduced in 1945. Even though it is now issued by the BCEAO (Central Bank of the West African States), its colonial roots are plainly evident. The BCEAO is overseen and partly managed by representatives from Paris.

In addition to the XOF there is the Central African CFA franc (XAF) used by another eight countries in Central Africa. The two currencies are equal in value, and readily exchangeable. However, they can only be used in their respective regions. Both were initially pegged to the French franc, and are currently pegged to the EUR. Countries which use the XOF and XAF are mandated to keep half of their foreign assets in the French Treasury. France guarantees unlimited convertibility of XOF/XAF to EUR. Some economists see this condition as a factor which limits the economic independence of XOF/XAF nations. Others see it as an economic stabiliser, and an important facilitator of international trade with Eurozone countries. A comparison of inflation rates between XOF/XAF countries and their Sub-Saharan neighbors confirms the latter fact.

Enter the Eco

The West African Monetary Zone (WAMZ) wants to introduce a new currency to replace the XOF, and to expand the Economic Community of West African States (ECOWAS). Doing so would give these countries greater freedom in setting their monetary policy, which is currently set for them by the European Central Bank. This move can also potentially set the stage to add more countries to the WAMZ, including those that don’t use the XOF. If all goes well, more than 15 countries may start using the new currency, which will be called ‘Eco’.

Teething troubles

The XOF nations also want to setup a West African Central Bank, which will be modeled after the European Monetary Institute (EMI). In fact, they’re emulating the same approach in rolling out the Eco which the EMI employed while launching the Euro. This is no doubt a tall order. The introduction of the Eco has been in planning since 2000. It was postponed several times due to economic and regional upheavals. Most of the applicant states still don’t meet its qualifying criteria. Many are still grappling with double-digit inflation rates and high fiscal deficits. Moreover there is ongoing debate about whether to adopt the Eco as a free-floating currency, to peg it to a stable currency like the EUR, or to bind it to a basket of currencies. Also, as of early 2020, not all ECOWAS countries are in agreement on the nomenclature of the new currency.

Impact on remittances

With a GDP of $164bn, Côte d'Ivoire is the largest of the XOF countries. Many Ivorians depend on their expat family members who send money online back to their families. One of the important costs of sending remittances is the exchange rate margin. When sending remittances from the Eurozone to Côte d'Ivoire the exchange rate margins are close to zero. This is because the XOF is pegged to the Euro. With the adoption of the Eco this may change. It depends on what the WAMZ decides about pegging the Eco.

What comes next

XOF countries are fully cognizant of the magnitude of adopting the new currency, and the vast efforts that this venture demands. They are motivated by the potential of significant long-term economic rewards for the entire region. In a notable development in May 2020 the French Central Bank declared that it would withdraw from the management of the central banks of XOF countries. It would remove the condition for them to maintain foreign exchange reserves with the French Treasury. The guarantee of convertibility of the XOF would also dissolve. These are big changes for the region.

The XOF nations are resolute in their commitment to have their new currency see the light of day. This may well happen before the end of July 2020. It is expected that only a few of the ECOWAS member states will initially start using the currency. More nations will be added to the currency union as and when they meet the criteria.

About Hemant G

Hemant G is a contributing writer at Sparkwebs LLC, a digital and content marketing agency. When he's not writing, he loves to travel, scuba dive, and watch documentaries.
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