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Faced with the debate over the transition from the CFA Franc to the ECO, the American financial rating agency, S&P Global, has decided to make its contribution.

In a report entitled: "Entering the Eco Age: Implications of Monetary Reform in West Africa", S&P examines the implications of this reform in terms of monetary and economic stability for the WAEMU, and its relations with its partners in the Economic Community of West African States (ECOWAS).

Thus, the agency basically retains 5 essential points to have a better approach to the transition from FCFA to ECO. First, S&P has indicated that the transition from FCFA to ECO will raise questions about the future of the CFA franc zone as a whole.

Then, in the short term, this reform should not have an effect on WAEMU sovereign ratings, as a devaluation is not on the agenda. At this stage, the Eco will remain pegged to the Euro and the France will continue to guarantee its convertibility. Then, in the event of a devaluation, Senegal and Côte d'Ivoire would be the most exposed economies because their dependence on foreign currency borrowing has increased sharply in recent years.

Pressure on the exchange rate would deteriorate the credit quality of WAEMU States. Strong fiscal discipline and sound economic fundamentals will be necessary to preserve WAEMU's economic stability. And finally, in the medium term, a single currency for the 15 ECOWAS member states seems unlikely.

December 2019: highlight for the future of the FCFA in West Africa

In Abidjan, Saturday, December 21, 2029, Ivorian President Alassane Ouattara and his French counterpart, Emmanuel Macron, announced the replacement of the West African CFA franc (XOF) by eco.

Much more than a simple name change, the overhaul of the monetary framework marks the end of the obligation for the WAEMU to deposit half of its foreign exchange reserves in an operating account at the French Treasury. In addition, French officials will no longer sit on the board of directors of the Central Bank of West African States (BCEAO), the monetary policy committee or the banking commission.

The revision of the monetary framework follows years of debate on the implications of the monetary agreement for the sovereignty of the eight WAEMU member states: Benin (B+/Stable/B), Burkina Faso (B/Stable/B), Guinea-Bissau, Côte d'Ivoire, Mali, Niger, Senegal (B+/Stable/B) and Togo (B/Stable/B). Created in 1945, the West African CFA franc has been pegged to the euro since 1999, after having been pegged to the French franc. Numerous demonstrations against the CFA franc have highlighted the unpopularity of the monetary agreement among part of the population.

This recent announcement has revived questions about the future of WAEMU. In particular, it raises the issue of monetary and economic stability as well as that of relations between the economic union and the other members of ECOWAS, the eco initially to be a single currency for Anglophone and Francophone West Africa. Moreover, these changes in WAEMU could open the door for the six member states of the Central African Economic and Monetary Community (CEMAC) to reform their monetary agreement with the France.

Fiscal discipline will be necessary to preserve the economic stability of monetary union

WAEMU members all have high current account deficits and therefore significant external financing needs, as a large proportion of low-income countries with large infrastructure deficits. This partly explains their dependence on imports and highlights the impact that a devaluation could have on imported inflation. Investment needs are material; this is why WAEMU members have significantly increased their public spending, in line with their national development plans (Plan Senegal emergent, Action Programme of the Beninese government, Togolese National Development Plan, etc.). As a result, commercial sovereign debt issuances have accounted for an increasing share of net external financing. As a result, there is an important link between fiscal and external deficits.

Most WAEMU member States have met, or have committed to respect, a convergence criterion limiting budget deficits to 3% of GDP, which reflects an improvement in the institutional framework in the zone. Nevertheless, the budget deficits carried forward were not the only factors responsible for the increase in public debt in WAEMU.

 
Off-budget financing needs, financial support to state-owned enterprises or the clearance of accumulated arrears are also at the root of debt growth.

In the case of Senegal, the financial support granted in the past to the postal group SN La Poste through an overdraft authorization, as well as budgetary transactions initiated in previous years and carried over from one year to the next, contributed to the historic peak in net government borrowing of 9.7% of GDP in 2018, well above the 3.7% carried-over budget deficit (see: "Senegal Outlook Revised To Stable On Rapid Increase In Government Debt; Ratings Affirmed At 'B+/B'," published on 6 December 2019 on RatingsDirect).

Despite the name change, parity with the euro will be maintained.

The monetary reform retains two key elements of the existing agreement: parity with the euro, and the unlimited guarantee of convertibility by the France. With the exception of the 1994 devaluation, which followed years of budgetary and external pressures and a significant misalignment. of the exchange rate, this guarantee has long supported confidence in the currency.

It has helped to contain inflation, even during periods of political crises or price shocks in the commodity market, unlike many other countries in sub-Saharan Africa.

Economic indicators for WAEMU have improved significantly compared to the 1980s and 1990s. The terms of trade have strengthened, budget deficits have narrowed, as has the current account deficit, and GDP growth has accelerated sharply, particularly in Côte d'Ivoire and Senegal, which account for more than half of the Union's GDP. monetary (40% for Côte d'Ivoire and 20% for Senegal).

In the event of a devaluation, Côte d'Ivoire and Senegal would be the most affected.

Although an exchange rate shock is not part of our central scenario, S&P has constructed an index to assess the relative sensitivity of the eight WAEMU members to a devaluation (as was done in the article "CFA Franc: Which countries would suffer the most from a devaluation? ", Published on December 4, 2017 on Ratings Direct). "We have also included in the ranking the six members of CEMAC, an area that has a similar monetary agreement with the France," the agency said.

The map below (see Figure 4) ranks countries according to their vulnerability to devaluation, determined on the basis of debt, fiscal, and external indicators. The ranking is derived from an index obtained by the sum of three factors normalized and converted on a scale of 0 to 1.

The sensitivity index includes:

– Debt sensitivity assessing public debt levels in foreign currencies to determine the direct impact of a devaluation on the level of government debt.

– Budgetary sensitivity taking into account the budget deficit to assess the importance of the financing needs of The States.

– External and inflationary sensitivity comparing the weight of imports from each country in order to analyze the impact of a devaluation on imported inflation.

A single currency for the 15 ECOWAS member states is unlikely in the medium term.

The introduction of eco in WAEMU can be seen as a preliminary step towards a single currency for ECOWAS, a project that was first mentioned nearly 30 years ago. ECOWAS leaders formally agreed to call it that in Abuja in June 2019.

However, material obstacles remain, which leads to consider this project as unlikely in the medium term. ECOWAS currently has 15 members: Cape Verde (B/Stable/B), Gambia, Ghana (B/Stable/B), Guinea, Liberia, Nigeria (B/Stable/B), Sierra Leone and the eight WAEMU members. Nigeria's GDP accounts for about two-thirds of ECOWAS' GDP ($670 billion) and is more than three times larger than that of WAEMU ($130 billion).

In addition, the Nigerian economy is largely dependent on oil revenues (which account for two-thirds of exports) unlike WAEMU members who are net importers of hydrocarbons. Agreeing on a common monetary policy between Nigeria and its ECOWAS partners therefore seems difficult, especially since Nigeria recently decided to close its borders with Benin and Niger in order to reduce smuggling and support local agricultural production.