The West African CFA Franc created in 1945 is used by eight West African countries: Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo.
Six Central African countries use the Central African CFA Franc: Cameroon, Central African Republic, Chad, Equatorial Guinea, Gabon, and the Republic of Congo. The Comorian Franc is used only by the Comoros.
Interestingly, all these countries were colonised by France except Guinea-Bissau and Equatorial Guinea who were colonised by the Portuguese and Spain respectively.
All these three currencies are backed by France, meaning they are pegged to the euro and can be freely exchanged.
France manages the issuance and printing of these currencies. In exchange, countries using the CFA Franc must deposit at least 50% of their reserves at the French Public Treasury.
The CFA Franc’s peg to the French Franc, and now the euro, has hindered the region’s economic development.
- Reduced liquidity: Governments may struggle to access necessary funds during economic crisis.
- Export penalties: Industries that engage in exports may face challenges due to fixed exchange rates.
- Limited central bank intervention: The central banks of these countries have reduced flexibility to cause economic growth since they are focusing primarily on inflation control.
- Investment scarcity: Businesses and households may face higher interest rates and reduced access to investment capital.
Benefits of the CFA Franc System for France
France still maintains significant economic control over the CFA Franc zone in the following ways:
- Access to foreign currency reserves: When CFA Franc zone countries have trade surpluses, their foreign currency reserves are deposited in French banks, allowing France to use these funds for international finance.
- Preferential market access: French companies enjoy preferential access to the markets within the CFA Franc zone.
- Resource exploitation: French companies can exploit and extract resources from these countries.
- Profit repatriation: French companies can freely repatriate their profits back to France without concerns about foreign exchange fluctuations.
- Investment flexibility: French companies can establish businesses anywhere within the CFA Franc zone.
However, despite these, the advantage of using the CFA Franc is that it is stable, and that in turn helps these countries immensely, which is why a change may not be on the horizon.
