The end of the West African CFA Franc and its replacement by the ECO in 2020 was announced. The French government’s role in the management of the currency will disappear. The monetary area will be ruled by an independent currency union with a fixed rate to the EUR (with no change in the parity) but without any guarantee from the French government. As any monetary area with an independent currency, West African countries will have to manage their foreign exchange on their own. The reserve pooling agreement that exists should be one asset to smooth country liquidity problems (not striking currently). The BCEAO (the common central bank) will also have to manage monetary supply in a balanced way between a credible framework (not too much money supply) and enough liquidity provision to the member states. Time will tell if the move was bright. The likelihood to see the Central African CFA to follow the same reform is low currently, in our view, since debt levels and institutional frameworks in that region are key barriers to the safe management of an independent currency.
Authors
Stéphane Colliac
