The CFA Franc’s Dogged Devaluation Designs

The CFA Franc two-decade old peg to the French counterpart and then the euro, with a 50 percent devaluation in 1994, is again under the microscope after recent commodity price decline worsened domestic and external imbalances in the respective Central and West Africa monetary unions, according to a ratings agency report which identifies countries most at risk from currency realignment. CEMAC’s oil export dependence puts it in worse position as current account and fiscal deficits were in the high single digits to national income at end-2016, with $5 billion in reserves covering just over half of monetary liabilities against the 20 percent minimum needed under the French Treasury arrangement. Budget gaps have eaten into liquid assets at the regional central bank, which has also exhausted overdraft facilities to member governments. WAEMU is more diversified with bigger output and leaders Cote d’Ivoire and Senegal register 7 percent GDP growth and better governance, S&P comments. Foreign exchange and fiscal reserves are “comfortable” and the analysis does not forecast formal depreciation but offers a sensitivity index ranking the most vulnerable in a switch. Congo, currently in negotiations on an IMF program with a low “CCC” sovereign grade, is at the top of the list with an 80 percent share of imports/output, the worst fiscal deficit in the two groups and a default record on its $500 million international bond. Its statistics are not reliable or frequent, and although the commercial debt burden would spike the relative damage would be greater in Cameroon, Gabon, Cote d’Ivoire and Senegal with bigger and more regular Eurobond issuance. They may have partially hedged risk through an African Development Bank window but another 50 percent CFA Franc drop would compromise budget positions and hurt ratings. Petroleum exporters Cameroon and Gabon already signed Fund programs and Senegal’s economic indicators are “much better” than in the 1990s. The sustainability debate over the currency regime has been “largely political” reflecting colonial era estrangement and new Asia outreach. In September protests erupted across the zones as Paris under President Macron unveiled a fresh Africa strategy stressing bilateral investment and security improvement, but immediate alternatives are lacking. Monetary flexibility is limited but low inflation in the 2-3 percent range, versus 15 percent for the rest of the continent average, has been a stability buffer outweighing possible competitive gains from devaluation, the review concludes.

Sovereign debt restructuring that may be in play regardless of exchange rate level should follow market-based recommendations compiled by an expert study group, according to the UN’s Economic and Social Affairs Department sponsoring the effort. Detailed templates should be developed for loans as well as bonds, and the more popular fiscal agent could be shifted to a trust structure to more easily bind creditors. Their committees should be free of conflict of interest, including holding credit default swaps on instruments while in dialogue and negotiation. The IMF’s “good faith” requirement must entail information disclosure and prevent arbitrary voting pool designation and is otherwise a “safety valve” to flag egregious behavior. Bank regulators including the BIS should reconsider capital standards and other treatment that foster pro-cyclicality and delay resolution despite both sides earnest engagement, the UN panel urges.