In January 1994 the CFA franc, the common currency of fourteen West and central French-speaking African countries was devalued by one hundred per cent compared to the French franc. This is the first such measure since 1948.
In fact the measure had been called for by the International Monetary Fund and the World Bank for some time. It was portrayed as a necessary and inevitable step in the framework of the reforms of structural adjustment in the region. The objective was to revive economic growth
in countries long afflicted by a deep economic crisis.
Two years on from the devaluation, a very hard decision for those interested which led to a lively debate between experts in France, it is interesting to look and see if the predicted results in terms of revival of development really did take place, or if, on the contrary, the negative repercussions of the measure tipped the balance on the positive results and aggravated the difficult economic and social situation of countries in the region. But to fully assess the situation, we must take a step backwards and illustrate the main features of the bond between the French franc and the CFA franc.
Since 1945 the French Treasury had guaranteed a fixed exchange rate between the two currencies of 1:50 (1 French franc = 50 CFA francs) in the Franc Zone’ (at the time French West Africa). The exchange between the two currencies had no limits and circulation of capital inside the region was totally free. The countries had to deposit sixty-five per cent of their reserves as the collateral for France covering any deficits in their balance of payments. Thus the fourteen countries concerned had a monetary union. These countries may be divided into two groups: the seven UMОА countries (Union Monétaire OuestAfricaine, consisting of Senegal, Mali, Niger, Burkina Faso, the Côte d’Ivoire, Togo and Benin) and six central African countries (Tchad, the, Central African Republic, Congo, Gabon, Cameroon and Equatorial Guinea), plus Comoros, which despite not being in the same geographical area is involved in the monetary union.
The minting of UMOA money is managed by the BCEAO (Banque Centrale des Etats d’Afrique de l’Ouest) and by the BEAC (Banque Centrale des Etats d’Afrique Centrale). Strangely, the initials CFA are used for both sub-zones: in West Africa it stands for Communauté financière d’Afrique and in Central Africa it means Coopération financière en Afrique Centrale.
The only non-French-country involved is Equatorial Guinea, which joined in 1985. We must stress that the exchange rate between the French franc and the CFA franc survived two revolutions, one political, the other monetary: namely, the 1970s decolonization process that
transformed the French colonies into independent states, and the collapse of the international fixed exchanged rate system in 1973.
Until 1985 the Franc Zone countries had higher growth rates than other non-African countries, but subsequent economic conditions deteriorated considerably. In the 1986-92 period the GDP growth rate in CFA franc countries was one per cent, while in the same period in other African countries it was around three per cent annually. At the same time CFA exports fell by forty per cent, touching almost zero, while other African countries experienced rises in exports.
So while linkage with the French franc had had no positive results since 1985, from then on it turned into a very uncomfortable armour for the countries to wear (also for the French Treasury). Several factors explaining the relative decline of the region are independent of monetary questions, such as the fall traditional exports from the area (oil, coffee, cacao, cotton and peanuts) due to a world phenomenon and the low productivity of the factors of production. But an extremely important factor was the overall gain of the French franc over the dollar (forty per cent in the 1986-92 period) that had a considerable influence on the competitiveness of raw materials from the area, quoted in dollars.
The loss of competitiveness caused growing indebtedness which plunged the region into a serious economic depression.
In this context the structural adjustment policies suggested by the Bretton Woods institutions included the liberalization of economic life, a reduced role for the state and moves to bring the economy closer to the market. This was a difficult prescription to accept in Africa countries, where the state has traditionally carried out an important role to make up for the lack of a dynamic entrepreneurial class and the structural weaknesses of all those factors (infrastructures, communications, capital markets) indispensable for the smooth functioning of a market economy.
Clearly, to this background the fixed exchange rate between the French franc and the CFA franc was an anomaly, especially since the real value of the CFA franc in the 1973-94 period could not be that unchanging value guaranteed by the agreement with Paris.
There had been talk of possible devaluation for some time, but it only actually took place in January 1994,when the heads of the African states had to accept the decision imposed by France in agreement with the Bretton Woods institutions to devalue the CFA franc by one hundred per cent compared to the French franc (only fifty per cent in the case of Comoros).
What could be expected from this measure? There should have been a positive benefit in terms of a stimulus to exports and a reduction in imports. Another benefit would be the growth in interregional trade, which was still small despite the shared currency. This effect would not be immediate, since it presupposed a deepening of economic integration measures in addition to monetary union. And in fact at the same time as devaluation, the seven Frenchspeaking countries of West Africa decided to create (Dakar, 11 January 1994) UEMOA. This organization combines the traditional common monetary policу with the integration of economic policies and the creation of a common market. Integration in the UEMOA framework has made considerable progress over the last two years and raises expectations for the future. This new integration process has left the other regional organization a little redundant (ECOWAS – the Economic Community of the West African States). The latter organization includes all the states in the region but has not been very effective in the past.
The prospects for economic integration in Central African are less bright. The UDEAC (Union Douanière des Etats d’Afrique Centrale) has been stagnating for years and seems unable to shrug off this inertia. Economic integration between the countries in the region is also fraught by crises at political level in individual states. No progress has been made even after devaluation.
The expected effect of devaluation on the public deficits was not easy to foresee, since both revenues and spending would be affected. One crucial point, if the move was to be successful, was that of keeping inflation under control: if devaluation was translated into an immediate rise in prices of the same size, then the effects would be cancelled out.
After more than a year, what picture can we draw of the consequences of devaluation? Did it only serve to placate the conscience of men afflicted with financial orthodoxy and lighten the burden on the French Treasury? Or did it provide a real boost for development?
Firstly, it must be said that the rate of inflation during the first year was fortyfive per cent: the feared immediate erosion of the effects of devaluation thus did not take place thanks to a strict wage policy (wages only rose on average by ten per cent).
Inflation was not keep down uniformly in all the various countries, however: there is a considerable difference between the 30 per cent in Burkina and Mali and the 50 per cent in the countries bordering on Nigeria (which exports a good deal to them and whose products became more expensive after devaluation).
But there was an even more significant difference in the effects of inflation on the rural and urban populations. The сіty-dwellers had to bear the worst consequences, since wage rises were much lower than inflation, thus causing a drastic fall in living standards. Country people, on the other hand, benefited from considerable improvements to their economic conditions since they no longer had a relative fall in income but an improvement in the exchange rate for their farm produce, thus increasing their relative income.
The most important positive effect of the devaluation was felt by agriculture, therefore, especially in crops for export. The fact that devaluation took place at the same time as a general price rise in international farm produce generated a twofold effect that stimulate exports and growth in the primary sector.
Although this is the main achievement of devaluation, it must be remembered that to a large extent it is due to the rise of world prices and therefore independent of devaluation. The positive effects would have been much smaller if world prices had dropped. Consequently, it must be seen as a combined effect of external circumstances.
As for non-export farm produce consumed locally (rice, maize, sugar and meat) their prices, which in general were too high before devaluation, have once more become competitive.
In general imports have fallen off and effects of devaluation on the balance of payments have been positive.
It must be stressed, however, that the consumption of imported commodities by the urban population is much greater, partly because they have to face a much more complex situation (the greatest difficulties were encountered in Benin and Cameroon – large importers from Nigeria).
The devaluation effect on foreign trade has thus generally been varied but positive, given that the countries with greater export potential (Côte d’Ivoire, Senegal and Cameroon) reaped the greatest dividends, whereas other countries have improved their balance of payments thanks to reduced imports and thus reduced demand rather than a recovery in exports – the main aim of devaluation. As for the prospect of industrial development, the effects of devaluation have been minimal or even negative, since the importation of intermediary products has become more costly: in fact only the agricultural industries have improved their situation. The basic problem is that setup of the French-speaking African industrial system is still geared towards the old model of import replacement, rather than being export-oriented.
The development of an export-oriented industrial system for the world markets seems to be the most urgent objective for the next few years. But measure such as devaluationare certainly not of much use in this effort.
The states in the region are stepping up their efforts in this direction through a commitment on two main fronts. First, investments to modernize the production system and improve the conditions to attract international capital, which in recent years has deserted the region discouraged by low yields and political uncertainty. Second, an intensification of regional economic integration processes, never bold enough in the past, and absolutely essential in the current world economic context.
In fact on looking at the most successful Third World regions in recent years we find the Asian countries with export-led economic growth – the result of a competitive industrial system – and the Latin American countries which are coming out of the 1980s crisis by deepеning the integration processes and modernizing their economies.
With wishing to slavishly follow exоgenous models of economic development in Africa at all costs (Africa should be able to create its own models), it is clearly difficult for the continent to escape from underdevelopment without greater participation by African countries in world trade.
We have seen how positive steps were taken towards the creation of a common market in West Africa (the creation of UEMOA). But the best reference point would be the creation of a market bringing together both West and Central Africa, since in any case the UEMOA market would still be very small. The problem is that the situation in Central Africa is very complex (see the chronic problems of a large country like Zaire, for example) and that for the time being the prospects of creating a large regional market are remote.
As for the possibilities of launching long-term plans with the aim of modernizing and diversifying the production system, clearly the real benefits of devaluation are fairly marginal and unable to produce the necessary resources. International cooperation must be forthcoming, therefore, to accompany the efforts of countries in the region seriously oriented towards structural change.
At present development cooperation policies are under fire in industrialized countries struggling with cutbacks in public spending and with a growing public scepticism about the achievements of North-South policies. The recent debate on the definition of the second financial protocol for the Fourth Lomé Convention highlighted considerable dissent on this subject between several European Union members.
The current trend in the debate is not so much towards a general withdrawal by the donor countries as a tightening up on the concept of development programmes.
In this sense the devaluation of the CFA franc may be seen as a necessary measure to remedy obvious imbalances: its effects in terms of stimulating development are neither immediate nor automatic. Devaluation must be seen as the first step in a more ambitious programme aimed at deep changes in the economic fabric of the countries concerned.
The success of such a programme cannot be left to more or less miraculous recipes but depends on a joint effort by African governments and international donors. If no such effort is made, the limited positive effects of devaluation will vanish in a few years and the underdevelopment of countries in the region will only deteriorate.