Exiting a longstanding currency union — as Burkina Faso, Mali and Niger propose to do by leaving the CFA franc zone, comprised of West African states that use the French-backed currency pegged to the euro — is not a decision to be taken lightly. For the departing members, in particular, alternative monetary arrangements could prove elusive and better solutions might be overlooked.
Furthermore, while other former French colonies — including Tunisia in 1958, Algeria in 1964, and Mauritania and Madagascar in 1973 — successfully left the franc zone, the context was Bretton Woods. Accordingly, the order of the day was comprehensive capital controls, strong international support for decolonization (notably from the US), and symbolic, rather than substantive, shifts in currency pegs — propitious circumstances that no longer apply.
Nevertheless, exiting from the CFA franc zone might be wise. The zone has long stagnated, uncertainties are already elevated by the security and governance issues these countries face, and the deep sense of the currency’s illegitimacy as a symbol of continued French hegemony constitutes a permanent vulnerability.
In particular, the IMF’s World Economic Outlook said in October last year that while the CFA franc zone’s inflation rate averaged about 3 percent between 1990 and 2019, annual real GDP growth per capita was just 0.7 percent — 2.2 percentage points below the best-performing countries at the same level of GDP per capita. Over three decades, that huge income shortfall has spurred jihadism, a spate of coups and an exodus of migrants.
However, that shortfall is not mainly due to monetary union. For example, real GDP per capita in Eswatini, part of the Common Monetary Area in southern Africa, was at parity with Burkina Faso, Mali and Niger in the early 1960s, but is now five times higher than theirs.
The divergence can be partly attributed to the Common Monetary Area inflation rate, which averaged 7 percent between 1990 and 2019. However, it mainly reflects differences in fiscal policy. Eswatini ran a modest average primary deficit, similar to that of its best-performing peers, between 1990 and 2019, and therefore also grew at their robust pace. The CFA franc zone by contrast — except for Burkina Faso, the union’s lone fiscal spendthrift — recorded primary balances during the same period that were, on average, nearly two percentage points of GDP tighter than that of its best-performing peers, stifling its long-run growth.
That excessively restrictive fiscal policy in the CFA franc zone is a byproduct of the grossly inadequate debt relief provided under the IMF-World Bank Heavily Indebted Poor Countries Initiative. However, given that creditors appear unlikely to provide CFA franc countries with the relief needed to implement pro-growth fiscal policies now, policymakers there are forced to seek other, secondary, sources of growth — including currency reform — or to resign themselves to stagnant, insecure futures.
Burkina Faso, Mali and Niger are evidently not so resigned. All three recently mounted coups to displace governments which, while formally democratic, were unable or unwilling to deliver prosperity or defeat Sahelian jihadism. In that context, the three — the Alliance of Sahel States — announced a study of a new common currency to express their collective sovereignty.
Currency scolds — averse to any tampering with French governance — are of course quick to criticize, but it is better to consider how and when new currency arrangements might actually work.
Given these countries’ external-financing constraints and capital outflows, adopting a new monetary regime would require shoring up budgets and securing an adequate stockpile of international reserves to avoid fiscal dominance and offering a one-way bet to currency speculators. To that end, policymakers would need to address security challenges, resolve governance issues, and strike a deal early on to split the balance sheet of the Central Bank of West African States (BCEAO) between those departing and those remaining.
In the interim, Burkina Faso, Mali and Niger should retain the CFA franc, with any unresolved, short-term financing issues minimized and expressed through arrears on external debt. If the BCEAO withholds lender-of-last-resort facilities during this period, these countries should impose carefully designed limits on bank-deposit withdrawals to buttress stability. Moreover, efforts to strengthen medium-term revenue, including resets to mineral contracts, should take high priority.
The main benefit of establishing a joint currency is mutual surveillance of budgets to boost the credibility of fiscal policy in the long run. On the other hand, idiosyncratic trade shocks, different monetary preferences and residual governance uncertainties call for separate currencies.
Regardless, Burkina Faso, Mali and Niger would need to establish new monetary and financial supervisory institutions before launch. Many countries in similar circumstances have introduced currency boards or exchange-rate pegs, at least at the outset to keep things technically manageable. Absent a credible regional currency with a moderate inflation rate to serve as an anchor, there is limited scope to raise the inflation target without a crawling peg.
If the three proceed down this path, international cooperation would help to ensure a smooth transition. For example, the Economic Community of West African States, from which they withdrew earlier this year, recently lifted sanctions against them. Likewise, the countries remaining in the CFA franc zone should continue to provide lender-of-last-resort facilities during the transition period, as they have nothing to gain from regional monetary disorder and orderly exits could even strengthen the legitimacy of the CFA franc zone for those who choose to remain in it.
Finally, international organizations and developed countries should offer enough debt relief so that all current members of the CFA franc zone have the fiscal space to introduce the best pro-growth policies.
Leaving the CFA franc zone is clearly a challenging endeavor, but it is not impossible, nor necessarily unwise — so long as, most critically, the authorities in Burkina Faso, Mali and Niger are committed to the necessary fiscal rigor.
Peter Doyle, a former senior staff member at the IMF, is a visiting researcher at the National Institute of Economic and Social Research in the UK.
Copyright: Project Syndicate
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