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For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

FACED with a turbulent economic and financial situation since the mid-1980s, the 14 African member countries of the franc zone made a historic decision to adopt a new comprehensive adjustment strategy, including a substantial realignment of the parity of their common currency. The new strategy should improve the economic outlook for member countries, strengthening the foundation for a full monetary and economic union.

Since its creation almost 50 years ago, the African franc zone has served its members well. The common currency, freely convertible, pegged to the French franc at a fixed rate, and supported by the operations accounts with the French Treasury of the zone’s three central banks (the BCEAO, the BEAC, and the Central Bank of the Comoros), provided an anchor for the economic and financial policies of the 14 African member countries (see box). On the whole, these countries benefited from a long period of stability with remarkably low inflation and—until the 1980s—sustained economic growth (see “CFA Franc: Zone of Fragile Stability in Africa” by James Boughton, Finance & Development, December 1992).

After 1985, however, external shocks and inadequate policy adjustments led to a deterioration in the economic and financial situation of the members of the zone—a situation that threatened their unity. In response, the member countries adopted a broadly based strategy consisting of a onetime change in the parity of their currency, effective January 12, 1994, coupled with a coherent set of macroeconomic and structural measures aimed at significantly improving economic growth and restoring confidence in the zone.

Mounting difficulties

In 1985, the economic and financial situation began to worsen as a consequence of two major shocks (see chart). First, the zone’s terms of trade deteriorated by about 50 percent, owing mainly to a sharp drop in world market prices for its major exports (cocoa, coffee, cotton, and petroleum). Second, the external competitiveness of the zone weakened further as a result of the marked nominal appreciation of the French franc against the currencies of the zone’s major trading partners. At the same time, the zone was handicapped by a number of structural and sectoral problems, particularly, relatively high wages.

Despite repeated attempts at internal adjustment, the economic and financial situation continued to worsen, with per capita income falling and financing gaps widening. In particular, the public sector faced increasing difficulties reflecting a shrinking tax base, weakening performance of public enterprises, and rising expenditures. The erosion of the tax base was attributable to the declining competitiveness of the export and import substitution sectors and the growth of the informal sector, including illegal trade. Rising production costs, especially wage costs, contributed to a substantial drop in profitability, most apparent in the public enterprise sector, and led to budgetary transfers. With the government’s wage expenditures representing more than 60 percent of current budgetary revenue and other outlays increasing markedly, the public sector financing requirement expanded significantly, crowding out the private sector. Considerable domestic and external payments arrears were accumulated, creating serious distortions for production and weakening the banking system. Under these circumstances, the zone’s attractiveness for foreign investors diminished substantially, despite the advantage of stable prices and exchange rates, and capital flight increased.

Limits to internal adjustment

To deal with an increasingly difficult situation, several of the countries in the zone tried to strengthen their internal adjustment efforts. The scope of the shocks and the magnitude of the imbalances, however, were such that the internal measures alone, while necessary—especially those intended to control wage costs and restructure the banking system and public enterprises—were not sufficient. Indeed, reliance on internal adjustment resulted mainly in increased tax rates being imposed on a shrinking tax base and in large cuts in priority current and capital expenditures, particularly in education, health, and infrastructure, thereby jeopardizing the basis for sustainable growth.

The unfavorable economic performance of the zone compared with other Sub-Saharan countries is shown by a number of leading indicators (see table). Although the zone has experienced no growth over the past eight years on average, the other Sub-Saharan African countries grew by 2.5 percent annually; the contrast in terms of per capita income, which is declining by some 3 percent in the zone, is even starker. Inflation, however, was lower in the zone countries. The overall budget and external current account deficits were also much larger in the CFA franc zone members, while external debt increased by nearly 40 percentage points relative to GDP compared with 14 percentage points in other Sub-Saharan African countries.


Two major shocks affected the zone’s economic climate

(weighted by 1985 GDP; 1985=100)

Citation: Finance & Development 31, 002; 10.5089/9781451952599.022.A003

Source: information Notice System. African Department: and World Economic Outlook, IMF.1An upward movement of the real effective exchange rates is an appreciation.2A downward movement of the terms of trade is a loss.

The alternative strategy

While a deepening of the internal adjustment strategy could have been envisaged, it would have pushed the zone further into a deflationary spiral that already showed signs of being socially untenable. The member countries consequently agreed that a far-reaching strategy, including a onetime change in the parity of the CFA franc and the Comorian franc, was required to keep the zone from falling further into recession and to prevent the members from choosing to act individually or separately. To be sure, the latter course of action would have inevitably destroyed the zone’s unity.

The member countries decided that a substantial devaluation was the best way to respond to the mounting difficulties and return to a path of sustainable growth. The parity adjustment is to be accompanied by comprehensive adjustment programs, including far-reaching fiscal, wage, monetary, and structural measures, tailored to the circumstances of each country, to ensure that competitiveness is effectively restored. Simultaneously, the member countries resolved to strengthen the foundation of their economic integration. Accordingly, they will meet at least twice yearly to coordinate their economic policies and monitor the implementation of their adjustment programs. As an important step, the member countries of the West African Monetary Union adopted a treaty establishing the West African Economic and Monetary Union.

Why 50 percent?

The size of the parity change was decided on the basis of a number of indicators that estimated the overvaluation of the CFA franc, including the evolution of the real effective exchange rate, the deterioration in the terms of trade, and the change in parity required to restore domestic and external equilibrium in the medium term.

The African franc zone: a profile

The 14 African countries of the franc zone currently consist of two separate groups of Sub-Saharan countries and the Islamic Federal Republic of the Comoros. The first group includes the seven members of the West African Monetary Union (WAMU—Benin, Burkina Faso, Côte d’lvoire, Mali, Niger, Senegal, and Togo—which have assigned responsibility for conducting monetary policy to a common central bank, the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO). The second group includes the six members of another common central bank, the Banque des Etats de l’Afrique Centrale (BEAC)—Cameroon, the Central African Republic, Chad, the Congo, Equatorial Guinea, and Gabon.

The two groups and the Comoros maintain separate currencies—the franc of the African Financial Community for the WAMU countries, the franc of the Financial Cooperation in Central Africa for the BEAC countries, and the Comorian franc for the Comoros. The currencies of the two groups and the Comoros, however, are commonly referred to as the CFA franc. The CFA franc was pegged to the French franc at a rate of CFAF 50 per F1 for 45 years prior to the January 12, 1994 devaluation. The Comorian franc was pegged at a rate of CF 50 per F1 from 1979 until the devaluation.

The two common central banks and the Central Bank of the Comoros each have an operations account at the French Treasury into which they deposit 65 percent of their foreign exchange holdings. Convertibility of the CFA franc into French francs through authorized intermediaries is supported by provision for central bank overdrafts on these accounts.

The zone members decided on the size of the change in parity—50 percent in foreign currency terms for the CFA franc (CFAF 50 to CFAF 100 for 1 French franc) and 33 percent for the Comorian franc (CF 50 to CF 75 for 1 French franc). An important consideration in deciding on the size of the adjustment was to set the rate at a level that would remain fixed for a long time.

The expected results

The parity adjustment, accompanied by measures aimed at controlling demand and fostering a recovery in supply, will enable zone members to regain competitiveness. This is because the parity adjustment, by changing relative prices between tradables and non-tradables, will encourage a shift of resources to the more dynamic sectors from the less growth-oriented sectors of the economy. Agriculture—which employs most of the population—may be the first to benefit. The same holds true for the nontraditional export- and import-substitution sectors. With improved profitability in these sectors, existing capacities would be utilized, growth and employment would be revived, and private investment would be encouraged. This, together with effectively targeted public investment, would lay the basis for further productivity growth over the medium term.

Unfavorable trends since the mid-1980s

CFA1 versus other Sub-Saharan African countries

article image
Source: World Economic Outlook, spring 1994, IMF.

Sub-Saharan Africa, excluding Djibouti, Liberia, Mauritania, Somalia, and Sudan but including Nigeria and South Africa.

Excluding Zaire.

Clearly, the devaluation will have repercussions for the general price level. It is important, however, that the onetime adjustment in the price level not lead to inflation. This will require strictly containing aggregate demand to ensure that the needed correction in relative prices between tradables and nontradables is realized and inflation returns quickly to its low predevaluation level. The return to financial stability will hinge crucially on the implementation of rigorous fiscal, wage, and monetary policies, as well as on the expected reduction in import duties and taxes. At the same time, the liberalization of procedures for foreign trade, marketing, and prices should stimulate competition and therefore limit price increases.

The example of countries that have used the exchange rate instrument provides compelling evidence that, with the proper supporting policies, inflation can be quickly brought under control, and normal rates can soon be restored. The zone also has a major advantage that can be particularly helpful: its common monetary policy based on strict rules prevents an excessive supply of currency from fueling inflation. If monetary policy and a firm fiscal policy, together with a prudent wage policy, are applied, inflation and wage costs can be controlled.

Social aspects

The new strategy should have a positive impact on the real incomes of most of the population and should contribute to reducing poverty as well as social and regional disparities over the medium term. In the agricultural sector, a sizable increase can be expected in the incomes of small farmers and wage earners producing export and food crops, whose purchasing power has eroded considerably since 1985. The new strategy should also benefit wage earners in other sectors involving international tradables, including the informal sector. In contrast, the short-term effects of the adjustment will be negative for groups employed in sectors involving nontradables—including the civil service—which represent a significant proportion of the urban population.

To minimize the short-term negative impact of the adjustment on the poorest and most vulnerable segments of the population, social safety nets are planned, based on the individual needs of each member country. In particular, specific tax and budgetary measures, as well as a temporary price freeze on a few essential goods, are expected to alleviate the burden of these social groups. In addition, a number of labor-intensive projects will be implemented with the assistance of nongovernmental organizations and some donors and lenders, particularly the World Bank.

The new strategy is also expected to lead to fiscal consolidation, which should mean an end to wage arrears. Such arrears have amounted to several months of wages in some countries, with serious effects on wage earners and their families. Moreover, the general economic recovery that should result from the zone’s improved competitiveness and higher investment levels will gradually create new jobs that will help improve the real incomes of all social groups in the medium term.

International support

The rigorous implementation of this comprehensive adjustment strategy should make it possible over time to reduce net financing requirements to sustainable levels and eliminate all domestic and external payments arrears in franc zone countries, thereby going a long way toward restoring the zone’s creditworthiness. The medium-term balance of payments viability of the African countries of the franc zone, however, will also hinge crucially on strong support by the international community. This support would need to include substantial debt relief from bilateral and private creditors. France has already taken far-reaching initiatives in this regard.

The IMF assisted each CFA zone country in formulating comprehensive adjustment programs. For 11 of the 14 countries, arrangements were already approved by the IMF’s Executive Board at end-March 1994. To put IMF assistance in place as rapidly as possible, a number of programs are being supported first with stand-by arrangements and are expected to be replaced by annual arrangements under the enhanced structural adjustment facility (ESAF). This facility supports low-income countries pursuing comprehensive adjustment programs with financing on concessional terms. At present, 12 of the 14 African countries of the CFA zone are eligible for the ESAF (Congo and Gabon are not eligible because their per capita incomes exceed the level that defines low-income countries). The World Bank has also closely collaborated in the design of the programs and has already assisted with mobilizing financial support. Very shortly after the adjustment programs were approved by the IMF’s Executive Board, the respective countries benefited from rescheduling arrangements with private and bilateral creditors, the latter under the aegis of the Paris Club.


The substantial realignment of the parity of their common currency is a significant move for the members of the CFA franc zone. This change is to be accompanied by a coherent and far-reaching set of macroeconomic, structural, and social measures tailored to the particular circumstances of each country. The strategy is aimed at restoring competitiveness, thereby improving both the use of existing productive capacity and the allocation of resources in the economy, as well as enhancing the zone’s economic diversification and ability to absorb external shocks.

As members of the franc zone make better use of their comparative advantages—particularly their abundant, young labor force—economic growth should increase markedly, thus improving the well-being of the population. The new strategy, if implemented with determination, should restore confidence in the zone and lead to a return of private capital and investment. Finally, the foundation for a full monetary and economic union would be considerably strengthened.


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