Analysis Of CFA Franc And Its Implications

In Africa, two monetary unions currently exist: in west coast Africa, the WAEMU, incentral Africa, the CAEMU. The both unions systems operate on the basis of principles of acurrency named CFAF. Those African monetary unions have some characteristics which guidetheir existent monetary policy. This paper set up an analysis of the advantages and disadvantages,focuses on the impacts of the fixed exchange rate system. According to the similarities anddifferences between African monetary union and the European monetary union, this paper givesan analysis to grasp the existence of the relationship.African monetary unions’ economics performances show a low level of inflation, slowdownin term of economic growth and a deficiency in competitive position. Zone Franc AfricanCountries trade mainly depend on agricultural exports to European countries like coffee, rubberand other primary products. In term of economic integration, the bilateral trade betweencountries of franc zone still less. The economy of Franc Zone countries are heavily rely toexternal, that inevitably cause a deeply dependence of the two unions currency on the euro inregard to the importance of Eurozone in term of economic cooperation. The formed and solidequivalence relation between African Franc and the Euro makes the European debt crisisinfluence the Franc Zone African Countries through the aspects of migrant remittances, foreigndirect investment (FDI) and commercial exchanges. From the analysis of the establishment ofthose African monetary unions compare to standard areas established to strengthen theirparticipation in international competition and set up stability, the African monetary unions stillhave a problem.In terms of foreign exchanges, the analysis of effects of the crisis in the Eurozone show thatdepreciation causes a risk of deficit of the balance of the trade due to price in the medium andlong term effect. The search for balance point (reinstatement of parity Euro-FCA) compressedexport demand and trade balance for the ZFAC. The depreciation of the trade balance isexplained through two aspects. Compared to the countries of the EZ, compression in theirimports of products from the FZAC is explained by budgetary restrictions and measures, thereduction of national income due to the present crisis. However the EZ remains the principaltrading partner for FZAC absorbing more than37%of exports except petroleum products. Thedepreciation of the euro should be theoretically cause a negative price effect and positivequantity effect characterized by an increase in exports to the rest of the world. But high is to notethat this was not the case because African countries have no competitiveness at the upstream ofproduction. This situation added to higher costs of imports, hardly improves the external trade ofthe FZAC. Compared to the off-Eurozone countries, the reason lies in the specialization ofAfrican industries in mining and the lack of diversification. More the weakness of the trade ofthe FZAC with other off-EZ countries does not benefit greatly in term of competitive advantagesdue to the fall in the euro on the international market. A seeking in the short term for a return to the equilibrium point following the shock through monetary policy, contracts ask of goods fromEurozone countries. Indeed in the FZ there has been an increase in inflation in the FZAC. Withregard to imports, many of the products imported by the FZAC (oil, fuel, etc.) are denominatedin dollars. The depreciation of the euro have a negative effect on the trade balance deficit ofAfrican countries and worse in the short term: we have on the one side a decrease of exportspenalized by a negative price effect, and on the other side swelling imports denominated indollars because of the adjustment of the import prices.The paper deeply discuss the effects of monetary policy on savings and the domesticfinancing. Since1994, due to devaluation of the francs in Africa’s economies nominal interestrates increase quickly, that leads to a quick increase of domestic deposits of French Africancountries. In the central African union (CAEMU) we have identical trends of this growth, but agreater difference between is observed in West Africa union (WAEMU). There exist an internalproblem in term of saving raising and investment because most of existent deposits are in formof fixed assets without a successful transformation into investment. Reason is various: householdincomes are less, the lack of financial institutions to reach countryside, as well as corruption andcapital flight. In fact, although there exist positive national economies growth, the per capitagross national product (GNP) have no obvious growth. It makes that there is difficulty to form ahealthy economy.At first, this paper deeply analyzes the African franc currency system effect on the domesticeconomy. To this end, this paper established two original statistical models as the basis of paneldata econometric analysis. According to the results of estimation of these two models, thepegging of CFAF to Euro with the fixed exchange rate, the common monetary system and itsinfluence on Franc zone national economies have a significant relationship. And then explain theinfluences of monetary policy on savings and the domestic financing. According to the fact thatthe BRVM market is still embryonic, the promoting effect of the appreciation of BRVM indexon the economy has any effective and significant impact because only stock holders can benefitdue to the asymmetry between financial market and real economy.This paper suggested the future West African monetary union should continue to strengthenmacroeconomic policy coordination between countries within the region; should widen financialaccessibility to countryside through closeness financial institutions; adopt floating exchange ratesto develop and broaden the Franc zone African countries; main countries should continue to playFrance’s political support.