Unclear what would happen to CFA franc if France withdraws from euro

Local currencies in many African countries have taken considerable strain since the prices of oil and other commodities took a hit.

Speaking at the GTR Africa Trade Finance Week in Cape Town yesterday, Edward George, head of group research at Ecobank, said that the low commodity prices caused a US$130bn loss in export revenue between 2012 and 2016 for the commodity-dependent countries of Nigeria, Angola, Republic of Congo, Equatorial Guinea and Zambia.

“That is a huge drop in revenue. Obviously that led to a liquidity crisis. It also hugely affected the currencies there,” he said.

“And even though in 2017 we expect a bounce back. We still think that by the end of this year, those five countries will have exports that are 53% below the peak they were in 2012.”

In addition, he said, one of the continent’s more stable currencies, the CFA franc, is now also under threat. The West African CFA franc and the Central African CFA franc are currently used by 12 former French colonies in the region (as well as Guinea-Bissau and Equatorial Guinea). They are pegged to the euro and backed by the French treasury, which means the economies have not experienced the same volatility seen in markets like Nigeria.

“The peg to the euro has been very good for the CFA franc over the last 10 years. We have had very low inflation, a very low interest rate and also the ability to effectively finance in local currency and euros at the same time,” noted George.

However, the upcoming French presidential election – and, more precisely, a potential win by the far-right candidate Marine Le Pen – places the CFA franc at risk. Le Pen has promised to pull France from the eurozone if she wins – and although recent polls suggest this is unlikely, similar polls have been proven unreliable in predicting Britain’s vote to exit the EU and Trump’s US presidential win.

So what would it mean for the CFA franc if France withdraws from the euro? George said this remains unclear.

“Can the Banque de France still guarantee the CFA franc against the euro if they are not a member of the euro? Does the euro become the Deutsche euro effectively because Germany is the only real player left in it? It’s a huge question.

“There are many tactical ways that Le Pen can continue, but if you ask me the market is going to be very unhappy and worried if suddenly we see this is likely to occur. If France really does withdraw from the eurozone, all bets are off for the euro and for the CFA franc. So expect volatility in this monetary zone.”