The central bank governor of the Economic and Monetary Community of Central Africa says that the advantages of the CFA franc’s peg to the euro greatly outweigh the disadvantages, but he believes deeper integration among its six members is needed for them to realise their potential in the long term.

Francophone African countries have often had very different economic experiences to other parts of the continent over the past 50 years. This is largely because the majority of these countries in west and central Africa fix their currencies at a rate guaranteed by France.

The French-speaking countries of Cameroon, the Central African Republic, Chad, Republic of Congo and Gabon, along with Equatorial Guinea, an ex-Spanish colony, form a monetary union with such an arrangement in place. Called the Economic and Monetary Community of Central Africa, and known by its French acronym Cemac, its currency, the CFA franc, is pegged to the euro, having been previously tied to the French franc.

The main advantage of this has been a bolstering of price stability. Between the 1970s and early 1990s, many countries in Africa suffered bouts of high inflation and currency depreciation, but this did not apply to the Cemac countries (or the eight members of the west African franc zone, whose currency, also called the CFA franc, is fixed to the euro at the same rate as the central African franc). Since 1948, the CFA franc has had to be devalued just once, in 1994.

Inflation today in the Cemac countries averages about 2.7%, far below sub-Saharan Africa’s average. The zone’s central bank, the Bank of Central African States (BEAC), which turned 40 in November 2012, says that low inflation has been its most important achievement. “The mission of the bank is to preserve monetary stability,” Lucas Abaga Nchama, governor of the BEAC, based in Yaoundé, Cameroon, tells The Banker. “It is the main thing we have done in the past 40 years. This monetary stability is an essential condition for having sustainable growth in the six countries.”

Devaluation unlikely

Yet the single currency has its detractors. Some locals say it is overvalued because of the peg and criticise Paris’s stipulation – in return for guaranteeing its convertibility – that Cemac members place 50% of their foreign reserves with the French treasury. Many talk of the need to 'decolonise' the CFA franc, blaming it for hindering exports and dragging down economic growth in the bloc, which tended to lag sub-Saharan Africa’s average rate of 4% to 6% during the 2000s.

Mr Abaga Nchama is a staunch defender of the currency’s fix, saying the benefits of low inflation outweigh any potential advantages of a floating exchange rate. “It is definitely a positive thing today,” he says. “In all systems there are advantages and disadvantages. But if you look back at the past 40 years, you can see that the peg has been very beneficial in terms of inflation.”

His denial that the common currency hurts exporters is backed up to a large extent by the external balances of most Cemac members. All of them, with the exception of the Central African Republic, are now oil exporters. This has allowed them in recent years to build foreign reserves and, in some cases, has led to hefty current account surpluses. Gabon’s stands at 10% of gross domestic product (GDP), while Republic of Congo has enough reserves to cover 14 months of imports, more than any other sub-Saharan country bar Botswana. The BEAC’s pooling of reserves, moreover, benefits any Cemac member that might otherwise struggle to access foreign currency to buy goods from abroad. “We centralise the funds. They belong to everyone,” says Mr Abaga Nchama. “That helps when countries find it difficult to import.”

Rumours regularly surface about a looming depreciation of the CFA franc (usually the assumption is that the central and west African francs would be weakened in tandem with each other). Mr Abaga Nchama would not comment on this, saying the currency’s rate was a decision for politicians. But several analysts, citing the positive balances with the French treasury, believe a devaluation in the Cemac zone would be unwarranted. 

Economic growth has been robust in the past two years, thanks in part to oil-related inflows. GDP in the zone increased by 5.3% in 2011 and was forecast by the BEAC to do so by more than 5% again in 2012. But politicians recognise that they need to diversify their economies given that production of oil, which accounts for 85% of Cemac exports and 40% of its GDP, is expected to fall in the next five years, particularly in the Republic of Congo and Gabon. While non-resource sectors have been growing, and at a rate faster than the oil industry, the region’s manufacturing base is small and agricultural production is low. Developing these would go a long way to cutting unemployment and poverty, which remain rife.

Further integration

Mr Abaga Nchama acknowledges the Cemac economies’ flaws, but he adds that efforts are being made to rectify them by improving infrastructure and encouraging private investment. “Today our economy is based essentially on exporting raw materials and importing manufactured goods,” he says. “By diversifying and enhancing the sources of growth, we can be assured of continuing to control inflation.

“Nonetheless, despite the international crisis, the Cemac countries have achieved promising results. Domestic demand remains high and the non-petroleum sector is contributing more and more to GDP.”

One of the BEAC’s roles is to encourage further integration between the six countries. Ties among them are less advanced than in the west African franc zone, with intraregional trade paltry, a customs union yet to be properly established (plenty of non-tariff barriers remain) and free movement of local citizens throughout the bloc not possible because Equatorial Guinea and Gabon maintain visa requirements. Mr Abaga Nchama says this needs to change. He adds that governments should to do more to combine their transport networks, energy infrastructure and agricultural policies. “We have an extensive list of challenges,” he says.

Some progress has been made recently in aligning tax, customs and legal systems. And most of the six countries are close to meeting the BEAC’s economic convergence criteria, which state that their inflation should not exceed 3%, that their debt-to-GDP ratios be less than 70% (for the zone as a whole, the ratio, partly because of debt forgiveness, stands at less than 20%) and that they have primacy fiscal surpluses.

To ensure that the countries abide by these, rules allowing governments to borrow the central bank’s funds to plug their deficits are being phased out. Economists hope this will aid the development of the local bond market, which remains shallow compared to those elsewhere in Africa. Cameroon has already started issuing treasury bills and bonds more frequently as an alternative to central bank financing. The Republic of Congo and Gabon have little incentive to follow suit yet, given their large budget surpluses. But in time they are likely to want to develop funding curves.

Ahead of Europe?

The Cemac’s banking sector is underdeveloped when compared with that in the west African franc zone. Its assets totalled only about $15bn at the end of 2011, according to The Banker Database. And thanks to a tough business environment, credit provision to consumers and businesses in the private sector is small.

But the BEAC has done much to strengthen the financial system since early 2010, when Mr Abaga Nchama, an Equatorial Guinean, was appointed governor. While a banking union has existed since the 1990s, he has brought supervision of lenders under the central bank’s control and given it more power to intervene with any distressed institutions. A deposit insurance scheme, moreover, was created in 2011, which has improved confidence in the sector and helped it attract more deposits.

Economic weakness in the eurozone, the Cemac zone’s biggest trading partner, is one of Mr Abaga Nchama’s main concerns. Yet he remains confident that the bloc’s members can sustain their current levels of growth. “We follow what’s happening in Europe closely,” he says. “But we don’t just sell to Europe. We sell to all over the world, including many parts that aren’t in crisis. We’re quite safe in that respect. We are entitled to be optimistic.”

Similar to the eurozone, the Cemac zone has to accommodate a diverse set of countries – from Cameroon, with 20 million people and a GDP of $26bn, to oil-rich Equatorial Guinea with a population of just 700,000, and the Central African Republic, which has a relatively small $2.2bn economy. Still, while Mr Abaga Nchama defends the efforts made towards integration so far, he admits more needs to be done to enable the Cemac countries to thrive in the long term.

“The six of them have achieved a lot,” he says. “They have moved from monetary integration to economic integration. We’re ahead of time in some respects. We don’t shout about it as we’re a small group of countries. But when you see our banking union, we’re ahead of Europe. But we still have a lot to achieve. What we have today isn’t perfect. We’re looking forward to better consolidation in the future.”

Lucas Abaga Nchama is governor of the Bank of Central African States


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