France Benefits at the expense of the African Franc Zone
- The member countries of the African Financial Community, a currency union with a fixed exchange rate pegged to the euro, grew at a slower rate than the rest of sub-Saharan Africa over the period 2000-12.
- The combination of an overvalued convertible currency, corruption, macroeconomic uncertainty and the free movement of resources across most of Francophone Africa encourages serious capital flight.
- A recent estimate places aggregate net capital flight out of the African currency union during the period 1970 to 2010 at around US$83.5 billion,117% of combined GDP.
- Capital flight of this order will have seriously reduced domestic investment and depressed economic growth.
Living standards among the fifteen
African countries in the mainly francophone CFA (Communauté
Financière Africaine) currency union have grown more slowly than in the rest of
Sub-Saharan Africa (SSA) since the Millenium. Between 2000-12, real GDP in the
CFA zone rose by an annual average of 4.1% compared to an average rise of 5.1%
across a more diverse group of SSA countries. The cumulative
impact of this difference in growth on indexed real GDP in these two parts of
Africa is shown in Chart 1.
CFA (Communauté Financière Africaine) members use a common
currency, the CFA franc, whose value is pegged to the euro at a fixed rate of €1= 655.957
CFA. The value and convertibility of the CFA is
guaranteed by the French Treasury, not by the European
Central Bank. The CFA is split into two zones : the West African Central
Franc Union (UEMOA) and the Central African Franc Community (CEMAC), which are
theoretically separate, but the two currencies trade at parity.
The CFA franc has been devalued twice in 1948 and in 1994,
but there is some evidence that the currency remains overvalued and there is
speculation that it may face another downward adjustment in its rate of
exchange with the euro. Not only is this
causing uncertainty, but the overvalued exchange rate harms the international
competitiveness of the CFA member countries. Unable to control domestic monetary
conditions, the inflexibility of the current arrangement means that these
countries are also more susceptible to external shocks. However, one of the most
harmful economic consequences of this monetary arrangement between France and
its former colonies is that it encourages the export of capital out of the
Capital flight occurs through both public and private
channels. The loss of capital from the public sector is a function of
corrruption and theft while private sector capital flight arises because of
macroeconomic uncertainty, unstable instititutions, a poorly developed domestic
financial system and the attraction of higher returns outside the country. All
of these conditions exist to differing extents across Africa, but capital
flight across the CFA franc zones is facilitated by the CFA’s fixed exchange rate and
convertibility with the euro and the legal free movement of funds between
member countries and the European Union.
Capital flight can be estimated by the extent to to which a
country is a net exporter or importer of capital taking into account normal and
abnormal flows. A recent study by Ndiaye (2012), published by
the African Development Bank and based on adjusted data from the World Bank and
Morgan Guaranty, estimates that capital flight across the CFA currency union over
the period 1970-2010 has been massive at around US$83.5 billion, or 117.4% of aggregate
GDP. The study found
that ten of the CFA countries analysed experienced positive capital flight, while
only five all UEMOA members,
benefited from net capital injections into their economies over the period. In
absolute value, netting out the five capital importers, four countries
accounted for the bulk of total flight over the period: the Ivory Coast (US$40.9
billion), Gabon (US$22.8 billion), the Congo Republic (US$20.1 billion) and
Cameroon (US$11.0 billion). For poor capital starved economies the size of
these flows are shocking, but as Chart 2 shows the potential economic
significance of capital loss can also be assessed in relation to a country’s
total income. In Guinea Bissau, for example, a country noted for political
capital flight over the period totalled 441% of GDP, while in the Congo and
Gabon, whose economies are dominated by oil, capital flight was 392% and 363%
of GDP respectively.
Capital flight at these
levels in poor countries has a number of potentially harmful effects including slower
growth and persistent balance of payments deficits. A statistical
analysis by Nidaye (2012) of the estimated capital flight data found that there
was a negative relationship between the loss of capital and GDP growth across
the CFA countries. The money leaving the CFA zone reduces the resources that
could have been invested to support domestic income expansion. The study
referred to above estimates that the level of flight represents an average of around
5.1x the value of investment expenditure in this group of countries. In the
case of the Ivory Coast, however, capital leaving the country was around 21x
investment spending. In contrast, the rate of domestic investment across the
franc union was feeble and volatile.
Reform of the CFA currency
union would be complex given the embedded nature of the control that France
maintains over the monetary policies of its former colonies. Indeed Mabaye
(2012) has called the franc zone ‘an appendage of the French economy’ arguing
that while the French state benefits from the African reserves it holds, the
private sector has gained from the preferential access companies gain in these
markets. It would also be politically difficult to change current arrangements
since local African elites, if not the bulk of citizens, benefit from the
ability to transfer resources freely into Europe without capital controls. But
the economic evidence demonstrates that reform is urgent in order for francophone
Africa to catch up with the growth in income and the investment returns that
attract so much foreign money across the rest of the continent.
Ariyoshi, A., Habermeier, K., Laurens, B., tker-Robe, I.,
Canales-Kriljenko, J.I., and Kirilenko, A. (2000), “Capital Controls: Country
Experiences With Their use and Liberalization”. Occasional Paper 190, IMF.
Bakare, A.S. (2011) “The Determinants and Roles of
Capital Flight in the Growth Process of the Nigerian Economy: Vector
Autoregressive Model Approach,” British Journal of Management and Economics 1
Gnansounou, S.U. and Verdier-Chouchane, A. (2012)
“Mésalignement du taux de change effectif réel : Quand faudra-t-il de nouveau
dévaluer le franc CFA ?” Bureau de L’Économiste en Chef, African Development
Bank, Working Paper No. 166, December.
Mabaye, S. (2012) “Decolonizing the Franc Zone,” Project
Syndicate 5 April: http://www.project-syndicate.org/commentary/decolonizing-the-franc-zone
Mabaye, S. (2013) “Africa’s French Roadblock, Project
Syndicate May 21: http://www.project-syndicate.org/commentary/lagging-economic-development-in-africa-s-franc-zone-by-sanou-mbaye
Ndiaye, A.S. (2012) “Une croissance économique forte et
durable est-elle possible dans une context de fuite massive des capitaux en
zone franc?” Paper presented at African Economic Conference, 2012, Kigali,
Rwanda, 30 October-2 November.