Monetary Sovereignty: beyond the mantra


The debate on monetary sovereignty in emerging countries is resurfacing with, on the one hand, the plan of Argentinian President Javier Milei to dollarise his economy, and on the other, the temptation of several West African country leaders to abandon the CFA franc. The abandonment of the CFA franc with the aim of recovering the flexibility of an unpegged exchange rate regime and greater autonomy of monetary policy, is an argument that is either weak in theory or unconvincing in practice.


The debate on monetary sovereignty has reappeared recently. On the one hand, we have the project of the new Argentine president, Javier Milei, to dollarize the economy. On the other hand, there is the temptation for some leaders from Central or Western Africa to leave the CFA franc which is linked to the euro.

The reasons are different.

In Argentina, it is strictly economic. According to President Javier Milei, replacing the peso by the dollar is the only way to fight inflation which reached 288% at the end of March.

Concerning the CFA franc, the reason is mainly political. It relies upon the sovereign principle that says that currency is a state prerogative that cannot be transferred to another state.

The economic measures taken by President Milei are brutal at the social level but they are consistent with the process of dollarization. In contrast, leaving the CFA franc raises a lot of questions. There are two main arguments in favour of more flexibility in terms of exchange rate and monetary policy. First, the fact that the CFA franc is supposedly overvalued.

Then, the brake on growth that is a constraint on monetary policy.

Let's enter into details.

Concerning the overvaluation of the CFA franc, the observation of the real exchange rate since the devaluation in 1994 shows that it is not patent neither in terms of level nor in terms of evolution.

In addition, the foreign exchange reserves of the Central Bank of West African States did not reach critical levels as it was the case at the end of 1993.

This first conclusion on the overvaluation

is the same than the one obtained with modelling tools.

Those of the IMF show either a slight overvaluation or a slight undervaluation.

In the case of developing countries exporting raw materials, the sometimes brutal evolutions of terms of trade, that is to say the ratio between export prices and import prices, call for some exchange rate flexibility.

But we can show with a simple model of general equilibrium that fits the data of Senegal that the extent of deterioration of the terms of trade that might justify a devaluation has not been observed these last twenty years. Regarding the brake on economic growth due to the lack of monetary flexibility, this argument seems to be clearly unfounded.

In real terms, growth in credit to the private sector within the states of the WAEMU was rarely below 10% year-on-year between 2013 and 2019. This is to be compared with an average real GDP growth of 6%.

It was even sustained last year in spite of the ECB's tightening monetary policy.

In short, the two main economic arguments that would call for monetary and currency sovereignty for the states of the WAEMU fail to convince in theory or in practice.

Though it is legitimate at the political level monetary sovereignty cannot be proclaimed, it must be obtained.