The Cfa Franc Zone And The Emu

Whether the prospective shift of the peg of the CFA franc to the euro would constitute an exchange rate arrangement with EMU countries would depend critically on the interpretation of the free convertibility of the CFA franc guaranteed by France. Nonetheless, this shift is likely to leave the CFA franc arrangements and operating features of the zone essentially unchanged. The current parity of the CFA franc could be considered in line with fundamentals. The potential economic consequences for the CFA franc countries could be positive over the long term, but there is a risk of a weakening of external competitiveness.

Whether the prospective shift of the peg of the CFA franc to the euro would constitute an exchange rate arrangement with EMU countries would depend critically on the interpretation of the free convertibility of the CFA franc guaranteed by France. Nonetheless, this shift is likely to leave the CFA franc arrangements and operating features of the zone essentially unchanged. The current parity of the CFA franc could be considered in line with fundamentals. The potential economic consequences for the CFA franc countries could be positive over the long term, but there is a risk of a weakening of external competitiveness.

About one-third of countries covered by the IMF's African Department are members of the CFA franc zone. With most other countries moving away from fixed exchange rates, the issue of an adequate policy framework to ensure the sustainability of the CFA franc zone is clearly of interest to policymakers and academics. However, little academic research exists in the public domain. This book aims to fill this void by bringing together work undertaken in the context of intensified regional surveillance and highlighting the current challenges and the main policy requirements if the arrangements are to be carried forward. The book is based on empirical research by a broad group of IMF economists, with contributions from several outside experts.

The CFA franc zone comprises a group of countries in central and west Africa whose currencies have been firmly linked to the French franc since 1948. It combines the features of a currency union with those of an exchange rate peg, and an analysis of its effectiveness must examine both dimensions. Viewed from the perspective of a currency union among the African countries, it would appear that the zone would not constitute an optimum currency area. But when France is viewed as an integral part of the system, the benefits—including discipline, credibility, and stability in international competitiveness—become clearer.

This book applies contemporary macroeconomic theory and econometric modelling techniques in order to address policy issues relating to the CFA Franc Zone, a group of francophone African Countries sharing a common currency that is linked to the French Franc / Euro. Within this methodological framework, the author analyses the way in which the monetary institutions of the CFA influence macroeconomic development and policy formation.

The CFA franc zone comprises a group of countries in central and west Africa whose currencies have been firmly linked to the French franc since 1948. It combines the features of a currency union with those of an exchange rate peg, and an analysis of its effectiveness must examine both dimensions. Viewed from the perspective of a currency union among the African countries, it would appear that the zone would not constitute an optimum currency area. But when France is viewed as an integral part of the system, the benefits--including discipline, credibility, and stability in international competitiveness--become clearer.

"The author estimates the degree of misalignment of the CFA franc since the introduction of the euro in 1999. Using a relative purchasing power parity-based methodology, he develops a monthly panel time series dataset for both the Economic and Monetary Community of Central Africa (CEMAC) zone and the West African Economic and Monetary Union (UEMOA) zone to compute a trade-weighted real effective exchange rate indexed series from January 1999 to December 2004. The author's main finding is that the real effective exchange rate appreciated by close to 8 percent in UEMOA and 7 percent in CEMAC, influenced by volatility in the euro-dollar bilateral exchange rate and conservative monetary policies in the two zones, resulting in a partial loss of competitiveness in export markets. The lower appreciation in Central Africa can be explained by lower inflation in CEMAC than in UEMOA and by the greater trade with higher inflation East Asian countries, partially offset by the peg to the dollar. However, the inclusion of "unrecorded trade" results in an appreciation of only 6 percent in the UEMOA zone and 6 percent in the CEMAC zone due to higher inflation in the two countries with unmonitored cross-border flows, Ghana and Nigeria. Using time series econometrics, an Engle-Granger two stage procedure for cointegration, and an error correction framework, a single equation modeling of the real exchange rate from 1970 to 2005 as a function of terms of trade, economic openness, aid inflows, and a dummy representing the 1994 devaluation, the author finds little statistical evidence of a long-run equilibrium exchange rate that is a vector of economic fundamentals. The dummy explains most of the real exchange rate behavior in the two zones, while openness in UEMOA has contributed to an appreciation of the real effective exchange rate. "--World Bank web site.

Although it has restrained inflation in member countries, the franc zone does not appear to have worked well to channel financial resources to efficient uses.