SNAPSHOT: Launch of new West African currency likely to face series of delays despite progress
On 20 May, France’s council of ministers approved a bill that will put an end to the regional currency, the West African CFA franc, as we know it. When the new currency will be implemented remains unclear, as the bill requires the approval of the French Senate and West African government institutions.
The West African CFA (XOF) will have a new name: ‘Eco’. However, it is possible this may change due to opposition from English-speaking countries Ghana and Nigeria, part of the West African Monetary Zone, which are included in separate plans to adopt a new currency, also called Eco. (See the map below) The following eight countries, part of the West African Economic and Monetary Union, are due to adopt the new currency: Benin, Burkina Faso, Guinea-Bissau, Côte d’Ivoire, Mali, Niger, Senegal, and Togo.
Under the new bill, the West African central banking institution, BCEAO, will no longer need to deposit up to half of their reserves in the French central bank, and French officials from the ministry of finance and central bank will no longer be represented at Eco governance bodies.
However, French institutions will maintain a ‘right of scrutiny’ in case of a major crisis, for instance if the external coverage rate of the currency falls below 20 per cent. This means that France will be able to nominate government representatives for a period ‘deemed necessary’ to combat a crisis, although their role in such meetings is unclear.
The Eco will continue to be pegged against the euro, but this is likely to change after a few years depending on how well the currency performs.
What’s in a name? The name-change is likely to reduce some regional animosity towards France, who many local groups perceive as continuing to control its former colonies through the CFA franc, which originally stood for franc des colonies françaises d'Afrique (Franc of the French colonies of Africa) but was changed to Communauté financière d’Afrique (African Financial Community). Some of that animosity has been fuelled by the West African Central Bank’s (best known by its acronym in French, BCEAO) lack of independence in policy decisions, including the requirement that 50 per cent of its reserves will no longer be kept with the French central bank in exchange for illimited convertibility from France. Instead, they will be managed by the BCEAO, which will be responsible for setting the monetary policy.
What’s the timeframe for implementation? Initial plans had set the Eco’s launch by July, but political and technical issues still remain unresolved. The French Senate needs to approve the bill and is due to submit a report on it in June. The final vote will be held in the third quarter of this year, although a specific date for the vote has not yet been announced.
In addition, the proposal needs to be ratified by the eight countries using the West African CFA. Given the current regional health crisis caused by the onset of COVID-19, West African government bodies could very well delay any such decision due to more pressing priorities in their home countries. Disagreement with the West African Monetary Zone, which groups the Gambia, Ghana, Guinea, Liberia, Nigeria, and Sierra Leone, over the name of the currency could also delay its launch as governments in the region seek to improve harmonisation of policies ahead of the African Continental Free Trade Agreement (AfCTFA); the operational phase of the AfCTFA was due to come into force in July, but was postponed indefinitely in April due to the impact of COVID-19.
Another sticking point: the accounts of the French treasury will need to be replaced by some form of warranty by the BCEAO, but several of its member states want to (at least partially) continue to have the rate of 0.75 per cent currently offered by France.
ASSESSMENT & FORECAST
While France’s move marks another step towards launching a new currency, companies in the region should anticipate further delays to its launch over the coming six months to a year. In the meantime, they should prepare for an eventual launch. While financial losses due to currency fluctuations are likely to be muted initially, as the Eco will be pegged against the Euro, other macro-economic indicators, such as consumer price indices, are likely to become more volatile in the long term. Such volatility is likely to have an impact longer-term investments. Financial planners should continue to monitor announcements by the French government, the BCEAO, and the national governments to assess the likely impact of the launch of the Eco on their operations.
Investors should also anticipate changes in the way that the Eco is governed. Governing the currency is likely to become a ‘Rubik's cube’ of monetary policy setting, as the economies of the region face very different prerogatives and will be impacted in varying ways by any new policies. The argument so far has been that because of the peg against the Euro, the real performance of the local economies has been masked, making any economic planning difficult. For instance, rather than stabilising local economies by setting the monetary interest rates, national governments have been forced to take on debt to increase liquidity in their home markets. The diverging priorities of the countries of the region, in parallel to opposition from non-BCEAO members, suggests further delays are probable.