What Can We Learn from the CFA Franc Zone?David Fielding Jean-Paul AzamLambert Bamba Mike BleaneySimeon Coleman Kevin LeeAkira Nishiyama Kalvinder ShieldsAnja Shortland David Stasavage

OECD, Paris 21.02.2006

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

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.

Recent History• Persistent Balance of Payments deficits in

some CFA countries in the 1980s.• High public and private borrowing from the

central bank in some countries.• 1994 devaluation. Reform of rules

governing central bank lending.• Now M corresponds to NFA in the

medium term. • Similar to a currency board, but with much

greater flexibility.

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?

Regional Integration(Economica 72: 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?

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.

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?

Nominal ConvergenceIndicators

• Inflation• External deficit / GDP• Budget balance / GDP• Tax revenue / GDP• Public wages / tax revenue• Capital spending / tax revenue

Nominal Convergence Indicators: (i) Inflation

Burkina Cote d’Ivoire Mali NigerSenegal Togo norm

-0.2

0.0

0.2

0.4

0.6

0.8

82 84 86 88 90 92 94 96 98 00

Nominal Convergence Indicators: (ii) Capital Spending

Burkina Cote d’Ivoire Mali NigerSenegal Togo Benin norm

0.00

0.05

0.10

0.15

0.20

0.25

0.30

86 88 90 92 94 96 98 00

Nominal Convergence Indicators: (iii) Tax Revenue

Burkina Cote d’Ivoire Mali NigerSenegal Togo Benin norm

0.05

0.10

0.15

0.20

0.25

86 88 90 92 94 96 98 00

Nominal Convergence Performance

• Inflation• External deficit / GDP• Budget balance / GDP• Tax revenue / GDP• Public wages / tax revenue• Capital spending / tax revenue

Nominal Convergence Performance

• Inflation • External deficit / GDP• Budget balance / GDP• Tax revenue / GDP• Public wages / tax revenue• Capital spending / tax revenue

Nominal Convergence Performance

• Inflation • External deficit / GDP • Budget balance / GDP • Tax revenue / GDP • Public wages / tax revenue • Capital spending / tax revenue

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.

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.

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.

period

BCEAO discount rate France CB refinancing rate

60 1322.5

10

What Drives the BCEAO Interest Rate?

Probability of an Interest Rate Cut

Variable 1 s.d. 2 s.d. 3 s.d. UEMOA inflation ↓ 1% 13% 62%

Output gap ↑ 2% 24% 83%

Govt debt / GDP ↓ 0% 2% 6%

Foreign assets / GDP ↑ 3% 5% 93%

What Drives the BCEAO Interest Rate?

• The BCEAO does respond in a systematic way to aggregate economic conditions in the UEMOA.

• But it is very cautious. 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.

• 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.