What Can We Learn from the CFA Franc Zone?

1. What Can We Learn from the CFA Franc Zone? David Fielding Jean-Paul Azam Lambert Bamba Mike Bleaney Simeon Coleman Kevin Lee Akira Nishiyama Kalvinder Shields Anja Shortland David Stasavage OECD, Paris21.02.2006

3. 1. Benin; 2. Burkina; 3. Cote d’Ivoire; 4. Guinea-Bissau; 5; Niger; 6. Mali; 7. Senegal; 8; Togo;9. Cameroon; 10. C.A.R.; 11. Chad; 12. Congo; 13. Gabon; 14. Eq. Guinea

4. The CFA Franc Zone • 14 countries: 12 former French colonies + 2 late additions. • Two monetary unions: UEMOA + CEMAC. • Two central banks: BCEAO + BEAC. • Two currencies (both called Franc CFA). • Both currencies pegged to the Euro (formerly the French Franc). • The peg is maintained by the French Treasury; this frees up the African central banks’ monetary policy.

5. Recent History • Persistent Balance of Payments deficits in some CFA countries in the 1980s. • High public and private borrowing from the central bank in somecountries. • 1994 devaluation. Reform of rules governing central bank lending. • Now DM corresponds to DNFA in the medium term. • Similar to a currency board, but with much greater flexibility.

6. Four Questions • Does the Franc Zone promote regional integration? 50 years of data versus 5 in the Euro Zone. • Has there been any substantial economic convergence? • Have the monetary authorities made good use of the flexibility given to them? • What is the impact of the system on the poorest households?

7. Regional Integration(Economica72: 683-704, 2005) • Controlling for distance & language, what factors affect the volume of bilateral trade? • And the degree of business cycle correlation? • Does a fixed exchange rate matter? • Does a common currency matter? • What about the wider policy environment?

8. Regional Integration • In the 1980s, being a member of the Franc Zone had an enormous impact on participation in regional trade. • The effects in the 1990s were substantial but much smaller. • In neither case does membership of the same currency area matter. • Perhaps the 1990s more closely reflect an exchange rate stability effect, rather than a policy distortion effect.

9. Looking More Deeply at Economic Convergence • We look at both “nominal” and “real” convergence indicators. • Has there been any nominal convergence in the UEMOA since the Convergence Pact of 1999? • How much real asymmetry remains in the UEMOA and CEMAC?

10. Nominal ConvergenceIndicators • Inflation • External deficit / GDP • Budget balance / GDP • Tax revenue / GDP • Public wages / tax revenue • Capital spending / tax revenue

11. 0.8 0.6 0.4 0.2 0.0 -0.2 82 84 86 88 90 92 94 96 98 00 Nominal Convergence Indicators: (i) Inflation BurkinaCote d’IvoireMaliNiger SenegalTogo norm

12. 0.30 0.25 0.20 0.15 0.10 0.05 0.00 86 88 90 92 94 96 98 00 Nominal Convergence Indicators: (ii) Capital Spending BurkinaCote d’IvoireMaliNiger SenegalTogo Benin norm

13. 0.25 0.20 0.15 0.10 0.05 86 88 90 92 94 96 98 00 Nominal Convergence Indicators: (iii) Tax Revenue BurkinaCote d’IvoireMaliNiger SenegalTogo Benin norm

14. Nominal Convergence Performance • Inflation • External deficit / GDP • Budget balance / GDP • Tax revenue / GDP • Public wages / tax revenue • Capital spending / tax revenue

15. Nominal Convergence Performance • Inflation  • External deficit / GDP • Budget balance / GDP • Tax revenue / GDP • Public wages / tax revenue • Capital spending / tax revenue

16. Nominal Convergence Performance • Inflation  • External deficit / GDP  • Budget balance / GDP  • Tax revenue / GDP  • Public wages / tax revenue  • Capital spending / tax revenue 

17. Real Convergence Measures • We have 40+ years of data on price and output movements in the Franc Zone. • Do the different economies face a similar macroeconomic environment? • Are asymmetries smoothed out over time? How fast? • Look at a “typical” shock causing prices (or output) to rise in the region.

18. Real Convergence Measures • Substantial heterogeneity in price and output shocks. • Some patterns emerge: Gabon/Congo versus the rest. • Price asymmetries are smoothed out (but not very quickly). • Output asymmetries persist indefinitely. • So there is no single monetary policy suitable for all countries.

19. Monetary Policy • The Franc Zone central banks are free to pursue an independent short-term monetary policy. • But there is substantial macroeconomic heterogeneity across the member states: no single policy is ever best for all. • So how active are the central banks? • We look at the BCEAO.

21. What Drives the BCEAO Interest Rate? Probability of an Interest Rate Cut

22. What Drives the BCEAO Interest Rate? • The BCEAO does respond in a systematic way to aggregate economic conditions in the UEMOA. • But it is verycautious. Typical movements in prices and output have almost no impact on the likelihood of a change in the discount rate. Only extreme changes prompt action.

23. The CFA has delivered substantial benefits (price stability, trade integration). • But there are potential costs for members of a monetary union with heterogeneous macroeconomic characteristics. • There is very little macroeconomic convergence, especially in those areas beyond the direct control of the central banks. • So monetary policy is extremely conservative.