By George Ott – Economist
The dual shocks of the Covid-19 pandemic and the international oil price slump are expected to cause severe damage to economies across the African continent.
Oil-dependent African sovereigns are particularly vulnerable to the associated drop in export revenues and resultant rise in currency pressures.
In this regard, there has been considerable uncertainty and speculation about the capacity of both the West African Economic and Monetary Union (Waemu) and the Economic and Monetary Community of Central Africa’s (Cemac) to absorb these shocks and to protect the value of their respective regional currency pegs to the euro.
The CFA franc (comprising the Central African XAF and the West African XOF) is pegged to the euro at CFAfr655.96/€.
Despite relative economic resilience across the Waemu region, oil-exporting members of the Cemac are coming under severe strain as international oil prices fell to decades-low levels.
Moreover, with the Cemac region still in the process of rebuilding external buffers drawn down during the 2014-16 oil price crash, the region’s capacity to absorb the massive shocks of the current global crises is expected to be limited.
With many indicators pointing towards severe strain on the CFA franc, concerns have been raised about a potential devaluation of the currency peg.
With speculation circulating in the local media across the Cemac region, both the Bank of Central African States (Beac) and the French Treasury have released statements to dispel rumours that a devaluation was on the cards.
On Tuesday, May 12, Bloomberg reported that Odile Renaud-Basso, the head of the French Treasury, affirmed the institution’s commitment to ensure the convertibility of the CFA franc, stating in a telephonic interview that they “do not see a need for adjusting the exchange rate. So that is not on the agenda”.
On the same day, Reuters quoted a statement by the Beac in which it denied that it was considering a devaluation of the CFA franc and that foreign exchange reserve levels remained “comfortable”.
With economic and financial pressures mounting on the CFA franc, there has been a measure of uncertainty pertaining to the French Treasury’s willingness to support the regional peg by ensuring the unit’s convertibility to euros at the current rate.
This commitment has not yet been tested and with economic conditions in Europe also hard hit, concern in this regard was arguably warranted.
Therefore, the French Treasury’s public backing of the peg is significant and reduces uncertainty at a time when severe pressures on the CFA franc are unavoidable.
These developments also add weight to our current baseline expectation for the CFA franc to remain pegged to the euro at the current rate of CFAfr655.96/€.
Although economic risks are set to rise across the region in the coming months, we nevertheless expect that financial assistance from multilateral organisations should have an added stabilising impact across both the Waemu and Cemac regions, with a host of member states already having received such assistance.