The cost of not reforming the CFA Franc on the Bilateral Trade of Member Countries: Some scenarios

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The cost of not reforming the cfa franc on the bilateral trade of member countries: Some scenarios

Dieudonné Mignamissi, Consultant Associate Professor
Faculty of Economics and Management
University of Yaoundé II

About the Nkafu Policy Institute

The Nkafu Policy Institute is a non-partisan, independent think tank of the Denis & Lenora Foretia Foundation in Yaoundé, Cameroon. Its mission is to provide independent, in-depth, and insightful policy recommendations that advance the Cameroonian economy and the economies of other countries in sub-Saharan Africa. Nkafu seeks to advance public policies that help all Africans prosper in free, fair, and sustainable economies. Its reputation rests on its independence, high-quality research, and innovative policy recommendations.

About Templeton World Charity Foundation

The Templeton World Charity Foundation recognizes that “human beings have distinct and remarkable intellectual, emotional, social, and spiritual capacities.” It aims to fund interdisciplinary research into what it means to be human. The foundation also supports work to translate discoveries into practical innovations that enhance the positive, distinctive capacities at the heart of human flourishing and well-being.

This research is part of the Nkafu Policy Institute’s reflections on strengthening the effectiveness of monetary policy in Francophone Africa, thanks to the financial support of the Templeton World Charity Foundation (TWCF). Grant ID#: TWCF 2022-30501.

This report was written by Professor Mignamissi Dieudonné, Associate Professor & “Agrégé des sciences économiques” at the University of Yaoundé 2. We would like to express our deep gratitude to the entire Nkafu Policy Institute team.

Abstract

This report aims to simulate the trade costs incurred by African franc zone countries as a result of the absence of currency reforms. Due to data constraints on interest variables, the period selected is 1995-2019, which is a sufficiently long period to analyze a simulation and extrapolate the results. To do this, we adopt a quasi-experimental approach, simulating two families of possible scenarios in relation to the status quo. The first family concerns what we call “conservative scenarios,” i.e. those which envisage reforms within the franc zone. Three scenarios are proposed, namely the cooperation scenario, the aggregation scenario, and the consolidation scenario. The second family of scenarios is made up of what we call “opening scenarios,” which envisage the extension of monetary reforms beyond the franc zone, to include wider zones (ECCAS and ECOWAS) in the sense of the African Union. In these scenarios, monetary unions are envisaged within ECCAS and ECOWAS, and we replicate the same scenarios as above. The various scenarios are simulated using an augmented gravity model, estimated using

the Poisson Pseudo Maximum Likelihood Estimator with High Dimensional Fixed Effects (PPMLHDFE) technique. Three main results are established. The first result is global. It states that, whatever the scenario adopted, the cost of non-reform is high and significant, although differentiated according to the two monetary unions studied. Thus, in the WEAMU, the most costly scenario is cooperation and the least costly is the transition to a single African currency; in the CEMAC, the most costly scenario is aggregation, and the least costly is the transition to a single African currency. The second result is country-specific. Three specificities emerge from the aggregation and consolidation scenarios, namely countries exposed to very high costs (Cameroon, Chad, Equatorial Guinea, and Gabon), countries exposed to lower costs (Congo, Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo) and countries that have benefited overall from this situation of institutional statism (Central African Republic and Guinea Bissau). The third result is time-related. According to this dimension of analysis, which also takes into account aggregation and consolidation scenarios, it emerges that the simulated costs have undergone a cyclical evolution, i.e. very high at the beginning of the period of study until 1997, decreasing overall although fluctuating thereafter (1998-2016), with an upward trend at the end, i.e. since 2017.

Keywords: African Franc Zone, CFA Franc, reform, costs, scenario, optimal currency areas, gravity model