Chapter 283 Exiting the West African CFA Franc Zone

But similarly, using the West African CFA franc as the national currency has relatively more disadvantages.

This point has been fully explained in the document before Jamei Bongo.

For example, the fixed exchange rate mechanism of the West African CFA franc, which is bound to the euro, also has hidden dangers. The most important impact is that the West African CFA franc zone countries cannot use exchange rate leverage to make external adjustments to their economies.

Because it is pegged to the euro, the West African CFA franc tends to fluctuate with the EU exchange rate. Whether and when the exchange rate will be adjusted depends entirely on the latter.

In addition, France can directly exert influence and even interfere in the monetary policy of the West African CFA franc zone through its representatives stationed in the monetary institutions of the West African CFA franc zone.

For example, in 1994, despite strong opposition from West African CFA franc zone countries, France insisted on requiring it to accept the IMF's structural adjustment plan, which ultimately resulted in the West African CFA franc being forced to devalue by 50%.

Burkina Faso’s most famous president, Thomas Sankara, once said:

“The West African CFA franc, linked to the French currency, is one of the weapons of French rule. Through this link, this monetary monopoly, the French economy and French commercial capitalists accumulate wealth from our people. That is why Burkina Faso Efforts are underway to end this through the struggle of our people to build an independent, self-sufficient economy.”

For Kolo, the strength of the West African CFA franc limits export competitiveness and the development of local industry.

The euro is a strong currency and the West African CFA franc has the status of a strong currency because it is pegged to it.

A strong currency is a tax on exports because it makes exported goods more expensive, and a subsidy on imports because it makes imported goods cheaper.

For example, most of Colo's product exports are priced in US dollars, and their currency, the West African CFA franc, is bound to the euro in exchange rate - the euro has generally been stronger than the US dollar since its inception.

This is more expensive for buyers importing products from Colo.

On the contrary, their import costs are relatively low, resulting in West African CFA franc zone countries often importing large quantities of foreign goods, which to a certain extent hinders the development of local industries.

In addition, according to their own situation, the EU implements a long-term tightening monetary policy, which is seriously inconsistent with Colo's economic status quo.

Since the West African CFA franc is pegged to the euro, the monetary policy of the West African CFA franc area has to be consistent with the monetary policy of the euro area. However, the differences between the current status of the euro area and the West African CFA franc area mean that the monetary policy of the euro area is not applicable to the West CFA franc area.

The end result is that the West African CFA franc has greatly restricted the development of Kolo.

This is because the ECB's primary objective is to fight inflation and the West African Central Bank has to follow the same policy.

It is based on this overarching goal that West African Bank and Kolo's banks have had to reduce credit to local businesses and African countries.

The credit-to-GDP ratio of West African franc area countries is only 23%, while the ratio in the euro area exceeds 100%. Local enterprises need funds to develop, and long-term tight monetary policy has made it more difficult for enterprises to obtain financing, which is not conducive to the development of local enterprises.

In addition, the West African CFA franc zone has exacerbated its debt crisis due to its inability to fully utilize its foreign exchange reserves.

Senegalese economist Dembele believes that handing over foreign exchange reserves "means that the money that should have met our country's investment needs to support our country's development has left our country."

As a result, a paradoxical situation arises: the African franc zone countries have a large amount of their own foreign exchange reserves that cannot be used in the French treasury, and the rate of return is extremely low. At the same time, they lack development funds and often have to resort to international finance. Institutions, either for aid or commercial loans, are forced to bear higher loan interest rates and sometimes have to accept certain political and economic conditions attached.

In recent years, the debt crisis in African countries has continued to intensify. The proportion of public debt in the West African CFA franc zone countries' gross national product has increased significantly from 34.4% in 2014 to 48.7% in 2018. This contradiction has exacerbated the debt crisis of West African CFA franc zone countries to a certain extent.

For example, Colo's current foreign debt has accumulated to 1.4 billion euros, which is basically equivalent to their GDP for the whole of last year...

But the good news is that Kolo has already met the requirements of the "Heavily Indebted Poor Countries Debt Relief Initiative" and is currently undergoing qualification review by international organizations including the International Monetary Fund. Once passed, he will receive more than 500 million Euro debt relief.

The so-called "Heavily Indebted Poor Countries Debt Relief Initiative" refers to the "Heavily Indebted Poor Countries Debt Relief Initiative" jointly launched by the International Monetary Fund and the World Bank in the autumn of 1996.

The basic goal of the "Heavily Indebted Poor Countries" program is to use the government resources saved by debt relief in the poorest countries to reduce poverty. These resources will be used to increase government payments for public services.

By becoming eligible to receive debt relief, Kolo has reached the "decision point" to participate in debt relief and can receive temporary partial debt relief from creditor countries.

On November 18, the International Monetary Fund announced in an announcement that Colo became the 34th country to qualify for the Heavily Indebted Poor Countries Debt Relief Initiative.

According to World Bank statistics, the per capita national income of Kolo was less than US$200 in 2003, and more than 65% of residents lived below the poverty line (less than US$2 per day).

By the end of 2003, Colo's total foreign debt reached US$1.8 billion, and the ratio of foreign debt to fiscal revenue was 396%.

This time debt relief, required by the International Monetary Fund, also includes a program of social reforms.

Because the national election was completed and the process was transparent and fair, it has been praised by most relevant international organizations, including the UN, the European Union and the African Union. The requirements of the International Monetary Fund have also been met.

Returning to the topic of Colo's currency reform, after exiting the West African CFA franc zone, Colo will also be able to get back the foreign exchange reserves they surrendered to France.

The surrender of foreign exchange reserves by the Central Bank of West Africa was one of the conditions for France to provide unrestricted convertibility guarantee for its West African CFA franc. The proportion of foreign exchange surrendered was initially 100% and was reduced to 65% in 1973.

For this part of the funds, France not only provides an interest rate of 0.75%, but also provides a devaluation guarantee, that is, when the euro depreciates relative to the International Monetary Fund’s Special Drawing Rights, France will compensate.

Kolo currently has 800 million euros in foreign exchange reserves in France. Getting this part of the funds back will also help their future development.

Finally, there are currently two CFA franc zones, namely the West CFA franc zone and the Central CFA franc zone.

However, the two CFA francs cannot circulate with each other, so the consequence is that there is very little economic exchange between the West African CFA franc zone and the Central African CFA franc zone, which also limits the transit transactions of the Port of Lome as an important port in Africa.

However, although there are so many benefits to exiting the West African CFA franc zone, Jaime Bongo still has some concerns about carrying out currency reforms and launching Colo's national currency.

The first is that in accordance with the recommendations of this document, the Kolo government will authorize the Bank of West Africa to issue currency.

And in the Kolo Monetary and Financial Commission, which is responsible for the currency-related policies of the designated country, there are a total of five members. The Bank of West Africa will occupy two places, one place for the Ministry of Finance, one place for the Ministry of Interior, and the last place will be occupied by the country. serves as economic policy advisor.

From this set-up, it can be said that the West African Group can easily control this committee.

Of course, Jamei Bongo had already expected this result.

And he also knows that Kolo's plan to withdraw from the West African CFA franc zone and issue a national currency is unstoppable.

But in addition, he also needs to consider France's attitude towards this.

You must know that before this, attempts by Mali, Burkina Faso and Côte d'Ivoire to issue national currencies among ECOWAS members all ended in failure due to obstruction by France.

The most classic example is that in the 1960s, in order to punish Guinea for withdrawing from the CFA franc, France organized sabotage activities, printed counterfeit banknotes to flood the Guinean market, and even prepared to overthrow the then Guinean President Sekou Toure.

In 1962, then-French Prime Minister Pompidou warned African countries considering leaving the franc zone—just look at what happened to Ségoud Toure.

Although today is different from the past, France should not be too wanton, but on the other hand, in the process of reducing debt in Cologne, France also needs a certain degree of support. Therefore, even if this plan is ultimately needed, It also requires some strategy.

Of course, this is not invisible to the Anglo-African Institute. In their assessment, France will be dissatisfied with Cologne's withdrawal from the West African CFA franc zone, but the possibility of taking drastic action on this matter is extremely low.

And they also suggested that this plan should not be launched until Jaime Godot completed his visit to Britain and received more support from the British government.