Advantages and disadvantages of the franc zone
FOR the past year or two, monetary cooperation between France and the African states with regards to what was called the franc zone seems to have evolved rapidly. Various events took place, the most significant of which were, on the one hand, in May 1973, the withdrawal of Madagascar from the franc zone, then, in July 1973, that of Mauritania; on the other hand, the signing of new cooperation agreements between France and the countries of Central Africa (Cameroon and States formerly known as of Equatorial Africa: Congo-Brazzaville, Gabon, Central African Republic, Chad) in November 1972, between France and the West African countries remaining members of the West African Monetary Union (Ivory Coast, Dahomey, Upper Volta, Niger, Senegal, Togo) in December 1973.
When the states of A.-O.F., A.-E.F. and Madagascar gained independence, it was necessary to define their monetary relations with each other, with France and with the rest of the world: with the exception of Guinea and then Mali, which chose to have a completely independent currency. , the monetary relations of the other States arose directly from the previous situation and prolonged the existence of three currencies issued respectively in West Africa within the framework of the West African Monetary Union (UMOA) (CFA franc), in Equatorial Africa and Cameroon (CFA franc distinct from the previous one), finally in Madagascar (Malagasy franc); they constituted the exchange system of the independent states of the franc zone. The franc zone is not only a currency exchange system, but it is also an area of economic cooperation.
The exchange system of African countries in the franc zone traditionally had three characteristics:
- The first related to the convertibility regime: between the countries of the franc zone, the principle was that of total freedom of exchange, while about the exterior, exchange regulations were identical.
- The exchange rate between France and the countries of the franc zone was fixed; in other words, the exchange rate of the member countries of the zone with respect to the rest of the world was defined via the exchange rate of the French franc.
- To ensure the fixity of the exchange and convertibility, monetary reserves were "pooled"; African countries had to hold their monetary reserves in francs and France guaranteed the value of African currencies against the franc. This character was reflected in the existence of an "operations account" opened by the French Treasury to the three African and Madagascan issuing institutions which deposited their reserves there. In principle, the operating account could become indebted indefinitely.
This exchange system was at the heart of a system of economic cooperation, which itself had the threefold aspect of monetary, financial, and commercial cooperation:
- The statutes of the central banks defined the framework of monetary policy in a manner that was both rigid and inspired by French customs; in addition, through the presence of its representatives on the board of directors of central banks, France participated in defining the content of monetary policies. France held half of the seats at the Central Bank of Equatorial African States and Cameroon (BCEAEC), in Madagascar and since 1967 in Mali, a third at the Central Bank of West African States (BCEAO), but in the latter case certain decisions had to be taken by a qualified majority implying in fact the agreement of France.
- At the same time, but in a legally independent manner, to promote development, France provided financial and technical assistance to the countries of the zone.
- Finally, the system was initially accompanied (before the signing of the Yaoundé Convention) by a trade preferences regime. Imports from outside the franc zone were subject to quotas, while France guaranteed the sale of certain African products at stable prices.
The evolution of the foreign exchange regime of African countries results from French and international economic developments rather than from specifically African changes: the increase in France's monetary reserves between 1958 and 1967 made it possible to establish a principle of freedom of exchange vis-à-vis - vis-à-vis the outside, to the point that after the 1967 reform there was hardly any difference in the conditions of convertibility inside and outside the franc zone.
It then appeared that the franc zone was not basically a zone of free convertibility protected from the outside, but a zone of cooperation between France and the countries linked to it by an operating account agreement. However, even in terms of convertibility, the reality of the zone was to manifest itself again when the events of 1968 forced the re-establishment of exchange controls which have since been repeatedly modified and finally relaxed. In these various circumstances, the countries of the "zone" harmonized their foreign exchange regulations with that of France.
There is another change which results from conditions external to African countries: the parity changes of the African currencies of the franc zone against the rest of the world.
Of course, nothing legally prevented the African and Malagasy countries from modifying, if each of them and France agreed, their parity vis-à-vis the French franc, but the spontaneous and effective solution was to maintain the parity with the French franc. This has resulted in a certain stability in economic relations with France and certain European countries, on the contrary a certain instability in relations with the rest of the world, and with the other African countries.
Despite the stability of exchange relations between countries of the franc zone, the trade and financial relations of these countries have undergone profound changes over the past ten years. The geographical origin of imports and that of foreign aid have diversified markedly, with France's share generally decreasing, unlike that of other European countries. Essentially, this diversification is linked to the association of the countries of the franc zone with the European Economic Community.
Only monetary cooperation continued during this period to be done exclusively with France. We can consider that this specific feature is largely due to the delay of European monetary unification compared to trade integration. However, within the framework thus maintained for monetary cooperation, monetary policy appears to have evolved. Growth in the money supply was generally rather moderate until 1967, then, from 1968 onwards, markedly faster. This acceleration can no doubt be explained in part by a faster rise in export earnings due to favorable trends in the prices of primary products on average. In African countries, the autonomous share of the money supply on which monetary authorities can act is relatively small.
This autonomous part is issued mainly in return for advances to the Public Treasury and medium-term credits. In these areas, during the period, but at variable dates depending on the issuing areas, the regulations in force were relaxed: thus, the ceiling for advances to the State was raised from 10% to 15% tax revenue, that these advances have been made renewable beyond the initial limit of two hundred and forty days per year and that the duration of the rediscountable medium-term credits has been extended from five to seven years. In fact, the growth of medium-term loans has been very marked in recent years but has mainly concerned the most developed countries of the franc zone. The weakness of medium-term credit in the least developed countries is not only due, it seems, to a lack of investment opportunities, but also to the conditions imposed for the rediscount at the Central Bank (notably the maximum proportion medium-term credit rediscountable in relation to the cost of the investment). Therefore, in 1971-1972, the issuing institutes were concerned with promoting credit to nationals, especially medium-term credit.
Alongside these gradual developments, the case of Mali, which in 1962 gave up membership in the West African Monetary Union, should be noted as an exception; it then experienced for several years a rapid and inflationary monetary expansion, then negotiated with France its reintegration into the franc zone: this was preceded by a devaluation of 50% of the Malian franc (May 1967) convertibility was restored in December 1967, while an operations account was opened for the Central Bank of Mali; the latter, unlike the operating accounts of the other three central banks, and despite slower growth in the money supply, has been and remains a significant debtor.
New agreements and new relationships
In turn, new relations have been established for a little over a year with the countries of Central Africa, Mauritania, Madagascar, and the countries of West Africa.
Madagascar and Mauritania left the franc zone. Their Central Bank no longer has an operations account with the French Treasury. In other words, the value and convertibility of their currency are no longer guaranteed by France. In the case of Madagascar, the exit from the franc zone marked the failure of a negotiation itself engaged in a critical phase of Malagasy political evolution: Madagascar wished to maintain an operations account but insisted on establish control over transfers to France. For Mauritania, on the other hand, better endowed with natural resources, this was an explicit political choice in favor of total monetary independence, and which corresponds to a political rapprochement with the Maghreb states.
With the countries of Central Africa on the one hand, and those of West Africa on the other, one year apart, new monetary cooperation agreements have been signed and which, in each of the two cases, provide for the maintenance of an operating account. The changes appear to be more important in the case of West Africa than in that of Central Africa; thus, for barely a year, the statutes of the Bank of Central African States (B.E.A.C.) will have been "ahead" of those of the B.C.E.A.O. which has now "overtaken" them, which may pose some problems in Central Africa and even in Mali, where the Minister of Finance has already sought harmonization with the rules of the U.M.O.A.
Before indicating several specific provisions, it should be remembered that the institutions themselves differ. France's place on the boards of issuing institutes has been reduced but remains higher on the board of the B.E.A.C. (one-third of the seats) to being on the B.C.E.A.O. (one seventh of the seats). To this difference in the relative weight of France correspond different relative weights between the member countries of each zone. in West Africa, each country has the same number of seats, each equal to that of France; in Central Africa, each of three thirds of the seats go to France, Cameroon and all four other states (Congo, Gabon, R.C.A., Chad) respectively.
In general, the multilateral spirit seems to be more developed in West Africa than in Central Africa and the spirit of monetary independence vis-à-vis France seems to be more developed there: not only the countries members officially retained the term monetary union, placed it under the authority of a "conference" of heads of state - and gave the Council of Ministers, of which France is not a member, a more important role , but above all the treaty constituting the UMOA, as well as the statutes of the BCEAO are now drafted without France's name being explicitly mentioned therein: the cooperation agreement with France could be terminated without ceasing to apply all the provisions of the Treaty of Union and the Bank's statutes; The monetary union could legally exist outside the franc zone.
To these provisions is added an Africanization of the management: since the adoption of the new statutes of the BEAC, the chairman of the board of directors is African whereas his predecessor, anachronistically, was French, but the managing director, without must necessarily remain so, is still French; at the B.C.E.A.O., where the president was previously African, the two functions have been combined in that of governor, who must be a national of the States of the Union.
Finally, the headquarters of the two issuing institutes, which was still in Paris (in fact, if not in law about the B.C.E.A.O.), must soon be transferred to Africa.
As far as the exchange rate system is concerned, the common point naturally remains. for the countries of the "franc zone", the existence of an operating account and the guarantee provided by France to the convertibility of the currencies of the zone. But the conditions under which this principle is applied have changed in some respects.
First, the rule of the centralization of external assets was relaxed the external assets of the B.E.A.C. may be, up to a limit of 20% (D.T.S. not included), held in currencies other than the French franc; those of the B.C.E.A.O. (D.T.S. and gold slice with F.M.I. not included) may be within the limit of 35%
Regarding parities, the agreement between France and the states of the U.M.O.A. provides that the two parties will consult "as far as possible" before any change in parity: the agreement of France is not legally necessary for the change of parity of the C.F.A. franc than that of the U.M.O.A states. to a change in parity of the French franc. Thus, is instituted a certain reciprocity which previously did not exist. A provision of similar scope exists in the agreement between France and the member countries of the BEAC, where provision is made, in addition to consultation “as far as possible” of these States for any modification of the parity of the French franc vis-à-vis -visit of foreign currencies, a consultation ”between the two parties before any modification of the parity of the CFA franc vis-à-vis the French franc: the term of consultation is a little stronger than that of consultation, but does not seem to impose legally the agreement of France. In fact, the political impact of these new provisions is less than it seems at first glance: it is hard to imagine that France, in the previous situation, refused a change of parity unanimously desired by the member countries of a zone: the main problem was and remains that of unanimity between countries whose economic development is often different. On the other hand, regarding the modification of the parity of the French franc, the expression "as far as possible" removes its imperative character for consultation. African countries therefore risk finding themselves, as in 1969, with a decision already taken.
Regarding the freedom of exchange within the franc zone, the stumbling block of negotiations with Madagascar, and its corollary, the harmonization of exchange regulations with third countries, the principle apparently remains unchanged. It is clearly recalled in the monetary cooperation agreements concluded with the member countries of the B.E.A.C. and the B.C.E.A.O. However, derogations are possible depending on specific situations, provided they receive the agreement of France and that of the other member countries.
Another point which has often been the subject of controversy is that of the freedom left to the Central Bank to pursue a policy of monetary expansion with a view to development, in fact the freedom to make advances. to the States and to largely grant the rediscount of medium-term credits. Without going into the substance of the debate on the advantages and disadvantages of an expansionary monetary policy for developing countries which are very open to the outside world, let us indicate the adjustments which have been made by the new agreements. First, the possibilities of monetary assistance to public treasuries in the form of direct or indirect advances (such as the rediscounting of public documents) were not only freed from any condition of duration, but also increased from 15 to 20%. tax revenue.
The conditions of medium-term credit have themselves been relaxed: in Central Africa, the maximum duration of rediscountable public and private bills remains seven years; in West Africa, the maximum duration is increased to ten years for public effects (it was six months in the 1962 statutes) and will, for private effects, appear to be freely determined by the board of directors. It is also specified that the medium-term assistance could be used for the promotion of national enterprises, and therefore, one might think, for the financing of the buyout of foreign companies by Africans.
Thus, a certain number of adjustments have been made to the internal management of the currency, which may make the guarantee provided by the operations account more useful. It has sometimes been claimed in the past that this guarantee was partly fictitious were important the precautions taken to avoid monetary inflation and because, in the statutes of the BCEAO (whose board of directors had less French representation than the other issuing institutions in the franc zone) were provided, in the event of external assets below a certain level, credit restriction measures which were automatic, but the extent of which remained undetermined: this "sword of Damocles", placed in a scabbard, in fact never came loose. It has since been established explicitly in Central Africa since, according to the statutes of the BEAC, if the operating account becomes debtor for ninety consecutive days, credit restriction measures, the extent of which is this time specified, must intervene and from which it can only be waived by a majority involving the agreement of France. The sword has, on the other hand, been speckled in West Africa, where it is only expected that, if foreign assets fall below 20% of sight liabilities, the board of directors must meet and then no new decision may be taken in matters of public documents at ten years or more and the acquisition of a stake in the capital of development financial institutions, except for an exemption granted unanimously. This reduction of a strictness, which was in part formal, seems justified insofar as the depletion of reserves may be due to external causes (for example a fall in the price of exported raw materials) unrelated to the Monetary Policy.
The problem of the franc zone appears for the future to be linked to that of economic integration in Africa and that of the international monetary system. Two reasons explain why, through the recent turmoil, the franc zone has held up. It served as a catalyst for the monetary union carried out explicitly in West Africa, implicitly in Central Africa, currently the only examples of this type existing in the world: the union is without doubt more important than the belonging to the franc zone, but this one, for a period which is perhaps only transitory, was necessary for that one. The franc zone also served as an anchor point for some African economies during recent vicissitudes of the international monetary system, due to the relative stability of the exchange rate of the French franc vis-à-vis other European countries; here again, as the recent floating of the French franc has raised fears, the contribution is perhaps only temporary. In the monetary system of the future, African countries will have to choose between autonomous fluctuations in their exchange rates, which may be of a certain magnitude, and exchange rate stability with France or preferably with all European countries: if one day indeed monetary union were to be achieved in Europe, cooperation with the EEC could replace in the monetary field, as was already the case in terms of trade and development aid, cooperation with France, and this for a larger group of African countries including English-speaking countries.