CFA – A currency
designed to Keep Francophone African Countries poor
By Hinsley Njila (firstname.lastname@example.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
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
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
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”.
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,
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