By George Ott, Economist, NKC African Economics
On December 21, Côte d’Ivoire’s President Alassane Ouattara announced that the eight member states of the West African Economic and Monetary Union (Waemu) and France had agreed to rename the CFA franc and implement a range of reforms to the long-standing regional currency.
Although talk of change had been in the air, the December announcement came as somewhat of a surprise, certainly to some others in the region.
The formation of an independent monetary union and the adoption of a regional currency has been a long-term goal for the broader 15-member Economic Community of West African States (Ecowas), of which all the Waemu states are members. Ecowas leaders met as recently as June 2019 and agreed to adopt a common regional currency, to be called the ‘eco’, as early as 2020.
However, with manifold challenges facing this project, the Waemu states appear to feel they were already in a position to get the reform ball rolling, ostensibly with the goal of facilitating the eventual formation of an Ecowas regional monetary union.
Aside from the broader Ecowas debate, the reforms announced in December to be implemented on the West African CFA franc include: renaming the CFA franc the eco; scrapping the obligation requiring Waemu members to keep 50% of their foreign reserves at the French central bank; and the withdrawal of all French representatives from decision-making and management bodies of the West African Monetary Union (comprising the same eight Waemu member countries).
Significantly, however, the eco will remain pegged to the euro and the Banque de France will continue to guarantee the convertibility of the currency.
Although these reforms represent the most substantial changes in the more than seven-decade history of the CFA franc, it nevertheless received a mixed reception.
While some commentators hailed the move as a significant breakaway from French involvement and a step towards monetary independence, others pointed out that the move was largely symbolic and the reforms ‘cosmetic’, as the maintenance of the euro peg will continue to dictate the scope of regional monetary policy decisions.
Another significant challenge facing the eco lies in the Waemu member states satisfying the convergence criteria for the adoption of the new common currency.
Key criteria are: maintaining a budget deficit of less than 3% of GDP; public debt ratio of less than 70% of GDP; annual inflation rate of less than 10%; and, maintaining a minimum of three months of import cover. Currently, it appears unlikely that the majority of the Waemu countries will meet all these criteria by the very ambitious inception date of July 2020.
Regional giants and fellow Ecowas members Nigeria and Ghana have also weighed in on the developments, adopting somewhat contrasting positions.
While Ghana came out strongly in favour of the eco and the formation of a broader regional monetary union (although not in favour of the euro peg but rather a floating exchange rate), Nigeria has taken a more cautious approach in first considering its official response.
With anti-colonial sentiment growing in the region, this move is perhaps mostly symbolic at this stage, and is to the political benefit of Mr Ouattara and France’s President Emmanuel Macron. However, this does not mean that it is not significant.
The long-standing Ecowas goal of establishing an independent, regional monetary union with a single currency remains in the minds of many in the region, and the decision by the Waemu to make the first move may yet prove to be a valuable viability test for this ideal.
Yet, in the meantime, with the maintenance of the euro peg, the reforms are not expected to have much of an impact on the currency, at least not in the short- to medium term. Moreover, the goal of officially moving to the eco by mid-2020 may prove to be overly ambitious.