CFA franc peg to Euro sustainable

Standard Chartered Bank considered that a devaluation of the West African CFA franc and the Central African CFA franc, which are both pegged to the Euro, is not likely in the near term. The CFA franc is the common currency of the West African Economic & Monetary Union and the Central African Economic & Monetary Community.

First, it anticipated that the depreciation of the Euro against the US dollar would benefit the CFA franc zones as it would improve their competitiveness and raise the value of their commodity exports that are priced in US dollars. It said that a weak Euro would lead to inflationary pressure, but it noted that this pressure is mitigated by the fact that a large share of the CFA franc zones’ imports are from the Eurozone, and food and oil prices are at low levels.

Second, it said that foreign currency reserves have declined, but not to a point that would trigger a devaluation.

Third, it pointed out that liquidity indicators could deteriorate due to lower commodity prices, but not enough to question the CFA franc’s peg sustainability, given that the currency’s convertibility is guaranteed by the French Treasury.

Furthermore, it added that the competitiveness benefits of a weaker Euro could offset the increased pressure on external liquidity. In parallel, Standard Chartered considered that Greece’s potential exist from the Eurozone is unlikely to affect the CFA franc’s peg to the Euro. It pointed out that the ‘fear of floating’ would prevent authorities from considering a flexible exchange rate, while a peg to a basket of currencies would imply the loss of the French Treasury guarantee that anchors the credibility of the current peg.