By Dr. Jean Cedric Kouam (Download pdf version)
Current Challenges of the CEMAC – France Monetary Cooperation Agreement of Nov. 23, 1972, for BEAC Countries
On Nov. 23, 1972, France and the member countries of the Bank of Central African States renewed their 40-year-old monetary cooperation agreement. This new agreement resulted in a profound reform of the governance of the BEAC and a vast movement toward monetary integration, marked in particular by the free movement of capital.
France remains the guarantor of the currency issued by the BEAC and of the deposit with its Treasury of all or part of the foreign exchange reserves of BEAC member states; this guarantee is unlimited. It also ensures the convertibility of the Franc of Financial Cooperation in Central Africa, which has been linked to the Euro since Jan. 1, 1999, by a fixed parity. In other words, the exchange rate between the CFA F and the Euro is fixed (central rate) and constitutes a reference around which a fluctuation margin can be allowed.
This new monetary and financial cooperation agreement between France and the countries of the Central African Economic and Monetary Community is not without consequences. Indeed, according to Mundell (1963), it is not possible for a given economy to achieve the following three economic objectives simultaneously: A fixed exchange rate regime, an independent monetary policy, and the free movement of capital. With the fixed exchange rate regime and the free movement of capital adopted in the CEMAC, it is difficult for the central bank to operate autonomously.
This study analyses the consequences of monetary cooperation between France and CEMAC, notably on the economic development of member countries (2) and the effectiveness of the BEAC’s monetary policy (3). However, it is first necessary to take stock of this agreement (1).
Status of Monetary Cooperation Between CEMAC and France
Since the devaluation of the CFA franc in 1994, the debate on the appropriateness of African countries minting their own currency has resurfaced, generating a lot of passion and almost leading to a head-on opposition between supporters of the CFA franc and its opponents (Mbaye and al, 2019). While some, like Kounkou (2008), believe that the existing monetary and financial cooperation between France and the Zone Franc countries, including those of the CEMAC, is an important tool for regional integration and would like it to cover all the countries of the Economic Community of Central African States, others see it as a colonial legacy that is difficult to overcome and as a zone that symbolizes an absence of monetary sovereignty.
The latter believe that this relationship should be re-examined today, specifically the obligation to centralize foreign exchange reserves with the French Treasury to guarantee the unlimited convertibility of the CFA franc and the fact that the currency remains strongly disconnected from local realities (Kako Nubukpo and al, 2016).
For the latter, the mechanisms of monetary cooperation, which are fundamentally based on guaranteed convertibility, parity fixity, free transferability, and centralization of foreign exchange reserves, are akin to a form of monetary repression (Tchundjang Pouémi, 1980; Bekolo-Ebe, 1986). Moreover, the pursuit of price stability as the primary objective of monetary policy does not always promote the economic development of individual countries (Tinel, 2016).
Consequences for the Economic Performance of BEAC Member Countries Today
The centralization of part of the foreign exchange reserves with the French Treasury (as a counterpart to the guarantee of unlimited convertibility of the CFA franc by the Euro) coupled with the presence of France on the BEAC’s board of directors is not without consequences for the BEAC’s monetary sovereignty. In the face of the multiple crises observed since the devaluation of the CFA Franc in 1994, there has been a reduction in the volume of financing available to support national economies; the rationing of bank credit to economic agents, not to mention the overvaluation of the CFA Franc as a result of its peg to the Euro (Mbaye and al, 2019).
The direct consequences of such a situation are increasingly numerous. They include an increase in public debt in all member states, a deterioration in the situation of public finances (widening budget deficits), and the difficulty of ensuring better coordination between the single monetary policy and national budgetary policies (Ekomié, 1999). The extent of these consequences is linked to the economic heterogeneities and the multiple asymmetric shocks that affect these different countries.
Impacts on the Effectiveness of the BEAC’s Monetary Policy
Monetary policy is an instrument of economic policy, effective in absorbing the effects of macroeconomic shocks. According to Ansgar and al (2017), the fixed parity between the Euro and the CFA franc lends credibility to the BEAC’s monetary policy. It promotes monetary and financial stability in the CEMAC countries, whose inflation remains well under control compared to other sub-Saharan African countries. Moreover, by guaranteeing the convertibility of the CFA franc, the operating account mechanism helps to strengthen the credibility of these currencies.
To evaluate the effectiveness of monetary policy in the CEMAC, let us consider the quantity of credit that the Central Bank makes available to the States. At a constant rate of circulation of money, the increase in the quantity of money in circulation has a significant direct effect on the volume of production and the general price level (quantity theory of money). The resulting inflation tends to increase the cost of the needs of economic agents (investment, consumption) and, in turn, the cost of access to credit (Odonnat et al., 1997). In the CEMAC, credit to the economy, although having increased by about 60% between 2012 and 2020 (BEAC, 2020), remains insufficient to finance sustainable and inclusive development and catch up with emerging economies as long as the CFA franc remains pegged to the Euro (Nubukpo, 2015).
Moreover, this pegging of the CFA franc to the Euro through a fixed parity on the one hand and the perfect mobility of capital adopted to strengthen sub-regional integration, on the other hand, seem to constrain the capacity of the BEAC to conduct a fully autonomous monetary policy, which affects the resilience of CEMAC economies to exogenous shocks (Mundell’s Incompatibility Triangle, 1960).
The policy recommendations that emerge from this analysis can be broken down into two main points
- Re-examine the monetary cooperation agreement between France and the CEMAC countries. In this respect, it is necessary to re-evaluate the appropriateness of centralizing part of the foreign exchange reserves of these countries with the French Treasury through the BEAC (in return for the guarantee of unlimited convertibility of the CFA Franc by the Euro). This revaluation could lead to new mechanisms likely to strengthen the competitiveness of the economies and guarantee certain credibility of the CFA Franc XAF on the international markets.
- Strengthen trade integration and make the free movement of people in CEMAC a reality. Acceleration of trade between countries would guarantee certain effectiveness of the monetary policy. Indeed, an autonomous monetary policy would allow the different countries to participate in the trade agreement while avoiding structural imbalance in the sub-region (Laporte, 1996). In this context, each country must diversify its production while specializing in the production of a good for which it has a comparative or absolute advantage.
The objective of this study was to examine the consequences of monetary cooperation between France and CEMAC on the economic development of CEMAC member countries and the effectiveness of the BEAC’s monetary policy. Although this agreement allows CEMAC countries to participate in international trade without fearing an exchange rate risk that would compromise their imports, it remains a colonial legacy that reveals the lack of monetary sovereignty of the BEAC zone. This is explained by Mundell’s (1963) incompatibility triangle.