28 December 2019

CFA Franc System In Trouble

In my opinion, the CFA Franc system has been a very positive contribution to Africa that has been a largely untold story. Monetary policy is an inferior tool at best for economic management, and the risk of corruption or incompetence in the central banking systems of these countries has been immense from 1945 to 2019 and continues to be.

A good counter-example is Latin America, which actually has a larger pool of competent civil servants to run their respective currencies than most members of the CFA Franc system, but in which almost ever country has at one point or another, frequently several times, experienced bouts of incredibly harmful hyperinflation due to mismanagement of monetary policy.
"Established in 1945, the CFA franc is used in two African monetary zones, one for eight west African countries and the other for six mostly petro-states in central Africa. Since 1999, it has been pegged to the euro, giving the member states monetary stability while supporting trade with Europe. 
In return, the members have to keep half of their foreign reserves in France, on which the French treasury pays 0.75 per cent interest."
A French official sits on the board of the regional central bank in both zones, and the currency is printed by France. Here is more from David Pilling and Neil Munshi at the FT. The French don’t like the optics it seems, and not all of the African nations benefit from losing the option of devaluing their currencies. The nature of the replacement system, however, is not yet clear. 
As an aside, occasionally you will meet people who claim this system costs the African nations hundreds of billions of dollars a year, through some kind of under-specified colonial imperialistic theft, combined with Junker fallacies I believe. You can file that one under “Big Time Conspiracy Theories That Most Americans Are Hardly Aware Of.” But I am, and it ain’t true: “…the current deal was actually profitable for the two African central banks because bank-to-bank credit is attracting a negative interest rate of -0.4%, but the central banks are receiving 0.75%.”
From here.

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