The Populism of the CFA Franc Backlash

In defense of the West African Economic and Monetary Union (UEMOA)

I started my career in investment banking in New York two years before heading to London. I recall in a morning meeting an announcement was made that the countries of Europe, which had been an alphabet soup of currency denominated bonds, divergent fiscal and monetary policies and challenges with intra-regional trade, were migrating to the Euro. Strangely, the biggest fear in the industry, which ultimately proved mostly unfounded, was Y2K, a computer glitch that threatened to shut down global IT systems when computers flipped from two character year designations to four characters. To his credit, the MD who made the announcement said the accession to the Euro would be the most significant event in economic history since the great depression and Bretton Woods. Since this time, the Euro zone has overseen growth in economic prosperity, greater levels of intra-regional trade and increased access to the global economy by historically marginal smaller economies such as Eastonia, and Ireland, whose access to the Euro has represented a sea change of opportunity. Of course, the Euro has had its challenges, including the greek financial crisis, discomfort from Germany as the lynchpin of the Euro economy, and of course Brexit, which no-one can understand as anything other than populism. Efforts to promote African political, economic and monetary integration have gained in pace, culminating in the recently ratified Pan African Free Trade Agreement, which promises greater levels of inter african trade, free movement of goods, capital and labor and in general bodes well for economic resurgence of African economies. Along the way, other regional integrations have also borne fruit. One of the most successful, in my opinion, I am biased because Senegal is a part of this region, is the West African Economic and Monetary Union also known by its french language acronym UEMOA - Union Economique et Monetaire des Etats de l'afrique de l'ouest. The UEMOA, importantly, in addition to economic integrations including the Common Exterior Tariff, guaranteeing harmonized customs duties and free movement of goods within the region, has achieved a level of integration that has been a long standing goal for African integration, which is the integration of monetary policy. A key feature of monetary policy is the requirement of stability of the money supply in relation to the growth in the economy. The Gold Standard, hailed by many economists throughout history was designed to peg the supply of a currency to the amounts of gold held in treasury. At Bretton Woods, the gold standard was scrapped for the full faith and credit of the government backing currency value. Government central banks would have the monopoly on the printing of currency and would ultimately be responsible for managing supply of currency in an economy. Monetary policy, including open market operations, fixing of reserve requirements and debt windows enable central bankers to manage the money supply in ways that can support the objectives set by the governors of the bank which typically include inflation targets and in the case of the united states, an unemployment target. The ability of the central bank, however, to control the money supply, exposes it to political meddling, which could ultimately it to pursue short term political objectives, not the long term objectives established at its creation. When the US president called for the repeal of Janet Yelen, at the time, the central bank governor of the united states, people rightly rejected that as a form of political interference in the independence of the central bank. There have been myriad examples of where political meddling has led to poor macro-economic outcomes including hyperinflation as politicians strive to wipe out their fiscal debts using monetary policy. Zimbabwe could be the most current example of where monetization of fiscal deficits leads to triple digit hyperinflation. Argentina and Venezuela have also had periods of hyperinflation due to mismanaged global capital policies and the interference of politics in the monetary system. Ironically, to ensure the stability of a national economy, it is often better that monetary policy be outside of the direct control of that country's sovereign leadership. Externalizing monetary policy is essentially a return to the gold standard, where the money is liked to an external benchmark. In the case of the UEMOA, monetary policy, has been externalized to a pan-African central bank, run by technocratic governors with oversight from the 8 countries included in the zone. A glance at the board of directors of the BCEAO shows presidents and ministers of finance from each member state. There is one additional seat provided by a member of the zone, the former colonial power, France. This is where populism becomes apparent in the debate about the CFA. There are two requirements of the Franc CFA, one of which is a guaranteed convertibility with the Euro, and a French member on the boad of directors of the regional central bank. Guaranteed convertibility with the euro at a fixed rate essentially means that France will underwrite the value of the currency notwithstanding the region-wide balance of payments. In absence of Cote d'Ivoire, most of the countries in the monetary union are running a deficit in their balance of payments, which means in essence, that they import more than they export. This deficit is structural, reflecting the lack of investment and competitiveness of local industry that has more to do with a failed industrial policy and poor mobilization of resources than the value of the currency. Cote d'ivoire, which is the world's leading provider of Cocoa (tellingly, it exports its raw materials due to a historical lack of a chocolate industry), is the only country which has a current account surplus. In other words, the other countries of the monetary union owe as much to Cote d'Ivoire as they do to France. This is very similar to the role Germany, as the region's strongest exporter, plays in supporting the value of the currency to the benefit of the other members of the Euro Zone. In a recent interview with France24, which, ironically is the leading source of news in the Francophone zone, an economist from Togo, which is an example of a small country which has largely benefitted from membership in the economic zone, and is the seat of the headquarters of Ecobank Transnational, a leading Pan-African bank, suggested several reasons why the CFA fails Africans. In this case, I believe, none of those objections are founded in reality. 1. Assertion: The CFA inhibits intra-regional trade When I first moved to Senegal in 2001, I was captivated by data which showed France has the overwhelmingly largest trade partner for Senegal, beating out the United States, the UK, China, Japan and Nigeria by a substantial margin. It was telling, in my eyes that the former colonial power continued to benefit, viewing its former colonies as export markets supporting its domestic industry and bolstering its national income. In response, I was determined to launch an industrial company which would produce goods, substituting those which would have otherwise come from France, as a measure of national sovereignty and economic patriotism. In my case our product targeted St. Louis branded sugar cubes, who's principal market was in fact, french West Africa. Other countries in the region favor crystalized sugar. Our packaged sugar products competed directly with St. Louis sugar, and our small packaging factory created 100 jobs domestically instead of supporting the employment market in France. The single currency in the UEMOA, the CFA, in fact, was designed to promote intraregional trade. In our business, we ultimately exported our product to two neighboring countries Mali and Guinea Bissau. We also exported to the Republic of Guinea, which had historically opted not to be included in the monetary union, experiencing much greater difficulty receiving payment from that capital impoverished country. The CFA does not inhibit intra-regional trade, in fact it facilitates it. 2. Assertion: A strong currency impairs the competitiveness of local industry. The factors contributing to competitiveness including a strong domestic education system, a favorable business environment, a capacity to innovate, skilled labor markets, and a strong domestic financial sector, cannot be created by devaluing one's currency. Consumer purchasing decisions are as much about habit and quality as they are about prices. Senegalese consumers continue to prefer the taste of the more expensive imported rice over local production. Television sets, mobile phones, windows, floor tiles and myriad other goods are all imported due to the lack of a domestic industry for those goods. These industries do not exist, not because of the convertibility with the euro, but because of a lack of investment capital, a challenging business environment, and an unsupported entrepreneurial class. Furthermore, UEMOA Regulations specify the ability to place targeted tariffs on products which compete with domestic industry. Such trade barriers exist for commodities such as sugar and cooking oil as well as for agricultual products including onions and tomatoes. When we want to, we have the tools to protect our domestic economies. Ultimately the sad truth is that currency manipulation cannot benefit local industry because local industry is structurally weak. 3. Assertion: The CFA is the cause of high liquidity rates of domestic banks and high interest rates. This reflects a fundamental misunderstanding of how banks operate. In an inflationary economy, lenders loose. When banks give loans, the value of the reimbursement is eroded by inflation. As a result, banks must add inflation rates to the interest rates they charge on their loans. In bank speak, a real rate of interest is the nominal rate, minus the inflation rate. For instance, for a 10% interest rate, the real interest rate is 4% if inflation is 6%. In countries with high inflation, interest rates on bank loans, therefore, must be higher. For instance, and by no means targeting these otherwise high performing countries, inflation in Ghana peaked at 9.5%, and in Nigeria finished the year at 11.9%. Loans in Nigeria reached interest rates of 18.3%. Ghana's loans had interest rates as high as 34.5% (Trading Economics). In these high inflationary environments, credit markets are at virtual stand stills. Mortgage markets are non-existent and credit to the economy is unavailable to stimulate economic growth. By contrast, due in large part to disciplined monetary policy by the West African Central Bank, which assures banking regulation in the CFA zone, the inflation rate has been less than 2% for over two decades. As a result, more reasonable lending rates of 7% - 8.5% are customary in banks in the UEMOA, which has led to a thriving mortgage market and wider access to credit from businesses in the zone. In fact, the low inflation environment in the UEMOA, tied to a stable external currency value makes the region one of the most stable in the world, which has implications for investment, credit to the economy and business confidence. 4. Assertion: Flexible monetary policy enables economic growth and ensures national sovereignty The two neighboring countries to Senegal, the Republic of Guinea, and the Islamic Republic of Mauritania provide striking counter examples to this assertion. Guinea, which boasts the world's largest reserves of bauxite, has nonetheless a startlingly weak economy. Notwithstanding its similar size, superior rainfall fed agriculture and strong mineral resources, Guinea's access to foreign currency, its inflation rate and its GDP all suffer. Guinea's official inflation rate reached 10% in 2019. It experiences a current account deficit of 4.9% of GDP per year and its GDP per capita is 50% less than that of Senegal. Mauritania, another country which opted out of the UEMOA has similarly challenging statistics, notwithstanding access to substantial reserves of offshore petroleum and gas. Mauritania's competitiveness, as measured by its current account deficit to GDP is a miserable 16% per year. Its persistently weakening currency continues to propel migration to Senegal which boasts a strong and more stable currency. Each of these countries suffers from quasi non-existent industrial sectors as a result of weak business environments, periodic political violence and absence of financial investment. Having one's own currency does nothing to solve these fundamental problems, in fact, it may help to exacerbate them when governments look to monetary policy to solve their budgetary challenges. Conclusion The key feature of the central banks of the UEMOA and the CEMAC, the two regions sharing the common currency of the Franc CFA, is their independence from political interference. Spanning 14 countries, no individual country president can unduly influence monetary policy. Notwithstanding any fiscal deficits, pre-election desires to stimulate targeted industries or political imperatives to manage external debts, the monetary policy will be unaffected. The pull of populism is strong the world over. The tendency to scapegoat historical opponents and other boogiemen reaches across the globe and is most recently exemplified by Brexit and similar populist and non-economic maneuverings by America's president. It is important that we seek to ensure the growth of prosperity in African economies, by pursuing sound economic policy, ensuring welcoming business environments and encouraging private investment. But bowing to the persuasive powers of populism is not the correct answer. We should recognize the forward thinking and execution of the leaders of the UEMOA and the CEMAC required to accomplish this form of monetary union in Africa, led by talented and well trained central bank professionals. Where I see successful economic outcomes led by Africans I think it is only right to recognize their efforts.