CFA safe under EMU.


What effect will the EMU have on the CFA zone? Main Siddiqi has the answers.

The creation of the EMU is scheduled to begin on 1 January 1999. This will be a milestone in the process of European Union integration and will herald the introduction of a single currency, the euro. France, a core EU member, is expected to satisfy the Maastricht treaty's criteria and be among the initial members joining the new euro zone. What implications does this have for the CFA franc?

France recently confirmed its intention of preserving the existing mechanisms of the CFA franc zone into the post-EMU era. This includes, most importantly, the French treasury's guaranteed convertibility of the unit, without interference from its EU members. Since 1948, the principle of fixed parity between currencies has provided francophone Africa with the benefit of a hard currency, and this has led to close political and economic integration with France.

A recent IMF study, The CFA franc zone and EMU presents an analysis of the economic implications of EMU for francophone Africa. The latter stands to benefit from its integration into the euro zone in three main areas. Firstly, enhanced access to EU capital markets: free capital flows, which exist between France and the franc zone, will be extended to all EMU members. Thus it will be feasible for CFA countries to tap off-shore funds and encourage inward foreign investment from European companies. Secondly, linking the CFA franc to a hard euro will enhance its exchange rate stability, hence containing imported inflation in CFA countries. Finally, there will be positive output effects. EU countries are major trading partners of francophone Africa (accounting for 50% of its external trade, of which France absorbs 21%). An enlarged EU will augment the market for franc zone exports and encourage greater export diversification.

Linkage risks

There are however some risks in linkage to a hard currency. An excessively stronger euro vis-[grave{a}]-vis the dollar and yen, and other emerging markets' currencies, will undermine the export competitiveness of the CFA franc zone. The bulk of francophone Africa's exports are primary commodities -- cocoa, coffee, cotton, and oil, and are denominated in US dollars. Thus if commodity prices remain weak and the euro appreciates steeply, CFA countries will suffer a significant deterioration in their terms of trade, as was the case in 1986-1993.

The major markets for primary commodities are outside...

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