CFA – A currency designed to Keep Francophone African Countries poor

By Hinsley Njila (hinsley@realfocus.org)

Every year, the CIA and World Bank publish a list of the poorest countries in the world. In the current list available on the CIA website, the majority of the former French colonies in Africa fall in the ‘bottom 50’ of the poorest countries in the world. Coincidence or factors like bad governance, failure to invest in building human capital, and the myriad of other reasons? Well, you guessed right. It is all of the above… and then some. But one of the most important reasons is that which is most common to the block of former French colonies in Africa, and that is the CFA francs.

See, in 1945 General Charles De Gaulle and his officials knew that sooner than later there’d be enough pressure for them to grant independence to their colonies. So they created the CFA which guaranteed they’d control the colonies for many decades after the so called independence. Today, the CFA is the common currency of 14 countries in West and Central Africa, 12 of which are former French colonies and are on the list of the world’s poorest countries.

The current predicament is an off shot of a colonial arrangement created by De Gaulle and his officials and ratified by African countries whereby 65% of their foreign reserves had to be stored in the French treasury. Another 20% of the reserves of these African countries were to cover financial liabilities; an arrangement which still holds some six decades later. African countries are also not allowed to know how much they have in their so-called ‘Operations Account’, for it is a highly guarded French Secret. Even though these reserves benefit the Paris Bourse (stock exchange) almost entirely, recent rules enacted by France in 1973 further restrict the two central banks (CEMAC and WAEMU), to impose a cap on credit extended to each member country equivalent to 20% of the country’s revenue in the preceding year.

Interestingly, after the euro’s introduction, African CFA member countries still agreed to maintain a currency peg with France through an agreement drafted by the French Treasury. Thus, since 1945 the French treasury has had the sole responsibility of the convertibility of the CFA francs to other currencies. The fixed parity between the euro and CFA is based on official conversion rate for the French franc and the euro set in 1999 (FF6.55957 to one euro). As the CFA100 to FF1 exchange rate has not changed since the devaluation of 1994, the CFA franc-euro exchange rate is simply CFA665.957 to one euro – permanently fixed!

This lack of flexibility has had devastating effects on the economic growth of African francophone countries. Brian Weinstein says in his book ‘Africanisation in French Africa’ how until 1960 France had not considered independence as a legitimate goal for its colonies, thus the reason France still controls the economies of its ex-colonies some 40 years later.

For every growth in France’s GDP, the euro appreciates against the Dollar, thus the CFA franc assumes too high an exchange rate. This puts the brakes on growth in the African economies that are also heavily dependent on commodities produced by Asia and South American countries that have much more flexible currencies. Put simply, a strong euro just kills CFA member economies as they experience declining export prices. Since 1994, growth in CFA member countries has remained quite modest. Overall output increased by less that 3%, compared to 8% in previous years. Rising oil prices has a devastating effect on non-oil producing CFA member countries because of the direct link to the euro. Oil prices are set in US Dollars and the value of the euro and CFA have risen some 30+% against the dollar. For the CFA and Euro, a strong exchange rate undermines export competitiveness as local goods are much more expensive.

A high fixed rate also kills economic growth in member countries, as it’s incompatible with productivity. The level of regional integration among member countries and the two central banks is remarkably low, even further undermining economic growth. Because the economies of Central African countries are heavily dependent on oil, and those of West Africa heavily dependent on other commodities, it is hard to argue for the long-term viability of the CFA unless of course you’re De Gaulle.

For these reasons, intellectuals like President Wade of Senegal and economists like Prof Mamadou Koulibaly (speaker of the Ivorian National Assembly) whom I met recently in London, among others argue that it is time for Africa to cut the umbilical cord with the French through their continued link with the euro through France. Today, the independence of francophone African countries is a myth. These countries need a currency that reflects their economies, one that is flexible and can benefit the commodities they produce; allowing them to be competitive in an increasingly global environment.

*The UN classifies countries as “least developed” based on three criteria: (1) annual gross domestic product (GDP) below $900 per capita; (2) quality of life, based on life expectancy at birth, per capita calorie intake, primary and secondary school enrollment rates, and adult literacy; and (3) economic vulnerability, based on instability of agricultural productions and exports, inadequate diversification, and economic smallness. Half or more of the population in the 50 least developed countries listed above are estimated to live at or below the absolute poverty line of U.S. $1 per day

Zambia: From the World Bank to China and Back

By Peter Bosshard*

African governments have often praised Chinese investment as the panacea for their infrastructure sectors. Zambia’s experience demonstrates that it is not. A Chinese hydropower project on the Kafue River has brought up the whole conundrum of financial problems, environmental impacts, hydro dependency and delays that is typical for large dams. Mining is the mainstay of Zambia’s formal economy, and consumes a lot of energy. When the copper sector started booming in 2002, finding new sources of energy became a necessity.

Since the mid-1990s, the Zambian government had tried to attract funding from the World Bank and private investors for the Lower Kafue Gorge Dam, a 750 megawatt hydropower project on a tributary of the Zambezi River. In December 2003, the government signed a Memorandum of Understanding to build the dam project with Sinohydro, a large Chinese hydropower developer. China Exim Bank was supposed to provide 85 percent of the funding. “After the World Bank dragged its feet on the project for years, we reached an MoU with the Chinese within three weeks”, Israel Phiri, a Zambian government official, announced triumphantly in 2004. Lower Kafue Gorge seemed to become a symbol for the fast pace of Chinese dam building around the world.

Or so Zambia’s government hoped. During the next few years, it repeatedly issued promising statements about the progress of the project. First, construction was supposed to begin in 2004. Later, construction was supposed to start in 2006. In January 2007, the country’s energy and water minister announced again that Lower Kafue Gorge was “coming through very well”, and that Zambia would negotiate a construction contract for the project very soon. The government also kept signing agreements for other hydropower projects left and right. Yet on the ground, nothing happened.

The reasons for the delays seem to lie in the problems of Zambia’s electricity sector. According to a recent report by the International Monetary Fund (IMF), the country’s state-owned electricity utility is “a troubled company, beset by inefficiencies and high costs”. One third of all customers are unmetered, and staffing costs and distribution losses are very high. Tariffs are low by regional standards, but at $500-600, connection fees are unrealistically high for the large majority of the population. The IMF report proposes to steeply increase electricity tariffs for all consumers. The government in turn argues that the World Bank’s push for privatizing the electricity sector was unrealistic, and the main cause for the electricity shortage.

Unlike the IMF, China officially attaches no strings to its loans and grants. Yet in February 2007, a senior OECD official observed that China Exim Bank “does not hesitate to discuss changes in project-related governance to ensure loan repayment (e.g., pressure to raise electricity tariffs to finance hydropower projects), while claiming that it does not specify firm conditions”. China may be dragging its feet over Lower Kafue Gorge for the same reasons as the World Bank five years earlier.

Sinohydro also interfered with the environmental impact assessment for the project. The dam would have serious impacts on the Kafue Flats, a wetland of international importance with two national parks. Anabela Lemos and Daniel Ribeiro, two experts on the Zambezi, report that Zambia’s power utility chose the project site after a balanced assessment of economic, social and environment factors. However, Sinohydro told the utility that this was not how they did things in China and that they wanted the site to be assessed only according to economic factors. In the end, the original site was selected, but, Lemos and Ribeiro say, “the role of the Chinese dam builders in trying to focus only on the economics of the project does not bode well”.

On February 26, a representative of Zambia’s power company announced that her utility was now discussing a $600 million financing package to boost power generation with financiers from Japan, India and western countries. The first priority was on the Lower Kafue Gorge Project. The World Bank’s International Finance Corporation was undertaking a feasibility study for the project. The IMF estimates that completing the dam would take six to eight years, with mobilization of finance as “a central challenge”. Five years after Zambia turned from the World Bank to Sinohydro, Lower Kafue Gorge seems to be back to square one.

While the government chases its dream of multiple new dam projects, the country’s existing power infrastructure is falling into disrepair. According to the IMF, more than a quarter of Zambia’s power plant capacity is currently being repaired because of neglected maintenance. In mid-February, the failure of a generator caused widespread power outages. Maintaining infrastructure is just as important as building new projects, but less prestigious and often neglected.

Meanwhile, the country’s power sector strategy with its focus on large projects has left poor people in the dark. A full 98 percent of rural people and 60 percent of urban dwellers don’t have access to electricity. In July 2007, the power utility began to ration electricity supply to residential consumers in order to service the growing mining industry. And the proposed new hydropower projects will not be used to expand power supply to rural areas, but to serve the mining companies and export power to other countries.

I am not an expert on Zambia’s power sector, but supporting mining companies through large dams seems to be a highly questionable development strategy. If the copper boom fades away in another five or ten years, Zambia will be straddled with an overcapacity of expensive power plants. If Zambia guarantees the mining sector a secure supply of power from additional hydropower projects but climate change reduces the stream flow in the Zambezi Basin, the government will have to cut out residential consumers from power supply altogether in order to fulfill its guarantees to the mining companies.

It seems to me that mining companies could take care of their own power supply by developing their own projects (as long as they follow the state’s social and environmental guidelines), or by negotiating power purchase agreements with foreign suppliers. Rather than taking on huge risks for a few private companies, the state and international financial institutions should concentrate their resources on expanding access to electricity in poor areas, particularly in the countryside. This will not require risky and potentially destructive dam projects, but support for decentralized, renewable energy technologies.

*Peter Bosshard is the policy director of International Rivers. His blog appears at www.internationalrivers.org/en/blog/peter-bosshard