Why is there currency inflation

The Eco: old wine in new bottles or real currency reform?

The CFA franc was launched in 1945 with the aim of reviving international trade relations after the Second World War through mutually exchangeable currencies. Even after the independence of the former colonies, the CFA franc remained the valid currency in most of the affected countries.

It is the currency mean in two currency areas. In the West African Economic and Monetary Union (Union économique et Monétaire Ouest Africaine - UEMOA), the so-called CFA franc BCEAO, which is issued by the West African Central Bank, has so far been used. In the Central African Economic and Monetary Community (Communauté Économique et Monétaire de l'Afrique Centrale - CEMAC), the so-called CFA-Franc BEAC, which is issued by the Central African Central Bank, applies.

The countries of Equatorial Guinea, Gabon, Cameroon, Republic of the Congo, Chad and the Central African Republic belong to the CEMAC. The UEMOA, on the other hand, includes the countries Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo, which in turn are also members of the West African Economic Community ECOWAS.

Coupling to the euro is controversial

Critics of the CFA franc see the currency as a holdover from colonial times and a fetter that maintains French influence and thus cemented power relations. The states concerned would also be hindered in their economic development.

The CFA franc is linked to the euro with a fixed exchange rate (655.96 francs = 1 euro) and is controlled by the French central bank, which pursues a restrictive monetary policy with low inflation (inflation target 2 percent). The two African central banks have to deposit 50 percent of their foreign exchange reserves with the French central bank. Overall, these reserves are likely to amount to around ten billion euros: money that is not immediately available to the African states. A representative of the French central bank with a veto right sits in each of the two African central banks.

The peg to the euro is mainly controversial because it is not possible for the countries of the CFA franc countries to change the exchange rate independently. An important economic policy instrument with which, for example, a currency can be devalued in order to boost exports. In the opinion of critics, exports from the CFA zone are relatively expensive and not competitive with products from non-euro countries. Imports from countries outside the euro zone are, in turn, relatively cheap, so that they displace their own products. This in turn inhibits industrialization. Due to expensive exports and little liquidity, people would refrain from setting up their own labor-intensive production lines. As a result, valuable raw materials are often exported abroad unprocessed and the local market is flooded with cheap products.

Proponents of the link to the euro, however, see monetary stability and low inflation rates as important anchors of stability for the region. Stability is particularly important for countries struggling with major political and economic challenges in order to attract investors.

Eco remains tied to the euro

With the introduction of the new Eco currency, there are important innovations: France is giving up its seat on the board of directors of the West African Central Bank (BCEAO) and it will no longer be necessary in future to deposit foreign currency reserves with the French central bank.

The Eco remains linked to the euro, however, the French will not go that far. If the euro were to break away from the euro, the fear that the West African countries would in future (even more) borrow from the Chinese is too great.

Due to the fact that it is still linked to the euro, critics see the Eco merely as a change in the name of the CFA franc. The Togolese economist and former minister Kako Nubukpo criticizes the fact that the currency continues to depend on events in Europe and not on those in their own country. He favors a flexible exchange rate. He sees emerging countries in Asia and Latin America as a role model, which have been able to stimulate their export economy with flexible exchange rates.

The International Monetary Fund (IMF), on the other hand, welcomes the decision to introduce the Eco and sees this as an important step towards modernizing the UEMOA. The link to the euro is seen as an important element of stability that has proven its worth in the past.

Effects of the new currency difficult to predict

It remains to be seen whether the introduction of the new currency will have a major or even a positive effect. Experts are critical of this because intra-regional trade is relatively weak and the countries are more export-oriented. A common currency makes little sense without economic integration. As long as the economic heavyweights of the region such as Nigeria and Ghana do not join the Eco, the positive effects should therefore be limited.

Nonetheless, the introduction of the Eco could bring some momentum to African trade. In addition, with the establishment of the African Continental Free Trade Area (AfCFTA), serious efforts are being made to promote the growing together of an African economic area. Politically, this is already a great success.

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