Emerging

Birth of the eco: essentially a symbolic change

st  
2
EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
Editorial  
Birth of the eco: essentially a symbolic change  
The end of the CFA franc and its replacement with the eco scheduled for next June address the legitimate desire of WAEMU member  
countries to manage what is already their single currency. Governance of the currency regime will change as the French Treasury pulls  
out of WAEMU entities, although it will still serve as the lender of last resort. Though the euro peg will limit monetary policy’s  
independence, it is necessary to shore up the macroeconomic stability of WAEMU, which is still fragile.  
The CFA franc officially ends  
Obstacles to greater flexibility  
On 21 December 2019, the presidents of Ivory Coast and France  
announced the end of the CFA franc and the operational reform of  
the West Africa Economic and Monetary Union (WAEMU). This is  
the first step towards creating a single currency for the 15 countries  
of the Economic Community of West African States (ECOWAS),  
comprising the 8 WAEMU countries plus Nigeria, Ghana, Gambia,  
Liberia, Guinea, Cape Verde and Sierra Leone. In June 2020, the  
eco will officially replace the CFA franc, and France will no longer  
participate in the governance of WAEMU, although it will still serve  
as the lender of last resort, at least initially. This reform reflects the  
perfectly legitimate desire of WAEMU countries to manage what is  
already their single currency. Its success will depend on maintaining  
its peg to the euro.  
In practice, gaining monetary sovereignty will not give the region  
more freedom to conduct monetary policy. Although the exchange  
rate is fixed, the BCEAO will have to maintain the spread that  
already exists between its key rate (2.5%) and that of the eurozone,  
even though most WAEMU member countries already comply with  
all of the convergence criteria defined in the monetary union  
3
proposal for the ECOWAS region .  
It is worth asking, however, if the WAEMU countries shouldn’t have  
seized the occasion to introduce more flexibility into the currency  
regime, by adopting a peg to a basket of currencies with a  
fluctuation band. This would have given it more manoeuvring room  
to conduct monetary policy.  
The main reason for the peg is to secure financial stability of  
WAEMU, which is still fragile. Since 2016, the region’s current  
account deficit has exceeded 6% of GDP, and the IMF does not  
foresee any improvements before 2022, with the start-up of oil  
production in Senegal. Above all, public debt has increased rapidly  
in recent years. From 35% of GDP in 2014, the region’s public debt  
rose to 47.6% of GDP in 2019 despite robust growth. Debt in foreign  
currency has followed a similar trend, gaining 11 percentage points  
of GDP over the past five years to 33% of GDP in 2019. Interest  
charges have also increased rapidly to more than 10% of the public  
revenues (including aid) of the Ivory Coast and Senegal.  
Change of governance  
In addition to the name change, the decisions made by France and  
the WAEMU countries end the requirement that the Central Bank of  
the West African States (BCEAO) deposit at least 50% of its foreign  
reserves with the French Treasury . French representatives also  
withdrew from the decision-making bodies and management of the  
1
region’s monetary policy.  
Yet France will continue to guarantee the unlimited convertibility of  
the new currency at the same fixed exchange rate of 655.957 eco  
for 1 euro. Technical details have not been released yet, especially  
the support mechanisms in case foreign reserves come under  
pressure. An unlimited credit line will probably be set up. Yet over  
the course of its existence, WAEMU has already demonstrated its  
resilience in the face of political and financial shocks: the state  
guarantee has only been activated once since its creation, just prior  
Moreover, the price elasticity of export and import volumes is low4  
due to the high proportion of non-transformable commodity exports  
to total exports (54%) and an insufficient industrial base to serve as  
a substitute for imports. In other words, their economies are not  
diversified enough for currency depreciation to have a positive  
impact. The CFA franc’s stability relative to the euro has neutralised  
fluctuations in oil prices (which are largely imported) given their  
negative correlation to the dollar. Most importantly, the states have  
extremely high foreign currency debts: external debt accounts for  
70% of the region’s total debt.  
2
to the 50% devaluation of the CFA franc in 1994 . It resisted the  
002-2003 political crisis in Ivory Coast (the zone’s biggest country)  
2
and the drop-off in commodity prices in 2015-2016. WAEMU has  
since rebuilt its foreign reserves to a suitable level (EUR 13 bn, the  
equivalent of 5.1 months of imports of goods and services at Q3  
2
019), thanks in part to Eurobond issues by Ivory Coast and  
Stephane Alby - François Faure  
Senegal over the past two years (totalling USD 5 bn).  
1
3
BCEAO will lose revenues on half of its foreign reserves, since the ECB paid a  
Inflation of less than 10%, a fiscal deficit of less than 3% of GDP, monetary  
preferential deposit rate of 0.75%.  
Before 1994, it was called WAMU (West Africa Monetary Union) but the main  
operating principles and modes were the same (unlimited convertibility,  
financing of the fiscal deficit of less than 10% of fiscal revenues, and a reserve  
coverage ratio of at least 3 months of imports.  
See M. Diarra “Is the balance of payments restricting economic growth in the  
2
4
guaranteed by the French state, existence of “comptes d’operations”).  
WAEMU countries? BCEAO Economic and Monetary Review, June 2014.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
Le site contient 2454 articles et 632 vidéos