eco TV

From the CFA Franc to the Eco, a smooth transition

2/11/2020

CFA Franc of eight West-African countries will face major changes in 2020. Beyond the change of name, governance will be modified. However, fundamentals remains and several hurdles will have to be overcome before to see further reforms.   

TRANSCRIPT // From the CFA Franc to the Eco, a smooth transition : February 2020

3 QUESTIONS

François Doux: Eight African countries will change currencies in 2020: Benin, Burkina Faso, Ivory Coast, Guinea Bissau, Mali, Niger, Senegal and Togo. I have 3 Questions for Stéphane Alby.

Hello.

Stéphane Alby: Hello.

François Doux: These eight countries are saying goodbye to the CFA franc and hello to the eco. What will change, other than the name?

Stéphane Alby: The main reforms concern its governance. France will no longer have a seat on the monetary policy decision-making and management bodies in West Africa. Above all, the operations account will be closed. This is particularly important: until now, BCEAO, the central bank of the West African States, had to deposit at least 50% of its foreign reserves in operations account at the French Treasury. Yet these reserves were highly liquid, freely accessible and yield-bearing.

In the future, BCEAO will manage its own reserves like any other central bank.

François Doux: Second question, Stéphane Alby. What will not change for these eight countries?

Stéphane Alby: The fundamentals remain the same. The peg to euro will be maintained at the same parity level, and the French Treasury will continue to guarantee the unlimited convertibility of the new currency. It will be a smooth transition. Yet the reforms are needed because the system has not be overhauled since the early 1970s.

By conserving the guarantee of convertibility, the authorities are seeking to protect the future currency from any speculative attacks. I would like to add that the system has already shown proof of resilience against shocks in the past. The French Treasury has only had to intervene once in its history of more than 60 years, and that was to inject hard currency into the region in the early 1990s.

François Doux: My third and last question: Some of the English-speaking countries of West Africa, notably Ghana and Nigeria, might also join the eco. What are the next steps? Should we expect any major upheavals?

Stéphane Alby: Not in the short to medium term. The eco that will be launched soon is very different from the currency being considered by the members of ECOWAS, the Economic Community of West African States, which is based on a flexible exchange rate system. Major obstacles will have to be overcome before the new currency can be launched, starting with the lack of macroeconomic convergence between these countries, especially in terms of inflation, which is much higher in the non-WAEMU countries. The integration of Nigeria, a regional giant, is also problematic. For the WAEMU countries, abandoning the euro peg is a major macro-financial risk for these economies, which have borrowed heavily in foreign currencies in recent years. In the short term, in contrast, we can imagine the integration of small economies like Cape Verde, which could integrate the eco at a fixed exchange rate.

One last factor: we can also expect to see changes and movements in the other CFA franc used by the countries of central Africa. Despite fairly advanced discussions, at this stage we still do not know the content of any future reforms. In any case, the year 2020 will mark a turning point in the history of the CFA franc.

François Doux: Thank you, Stéphane Alby. For our viewers, WAEMU stands for the West African Economic and Monetary Union. That’s right, isn’t it, Stéphane?

Stéphane Alby: Yes, that’s right.

François Doux: Thank you for this update on the eco, which will be launched later this year.

Tune in next month for another edition of EcoTV.

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