Will the CFA Franc have to be devaluated again?

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The euro area continues to be the largest trading partner of the franc zone countries with a very important share (more than 70 per cent of trade) in half of the 14 countries. Membership of this zone has the advantage of restraining inflation over the long term. The common currency has also been used as a basis for regional integration with strong institutions. However, compared to other African countries, the franc zone countries are less competitive in international markets and seem less equipped to counteract some exogenous shocks, which partly explain their low growth rate. Starting from 2003, due to the appreciation of the euro against the dollar, the CFA franc (CFA) has gradually appreciated against the dollar. The misalignment curve of the CFA seems closely linked to the exchange rate euro/dollar except in the case of price increases in major commodities exported by each country.

The main objective of this paper is to check the veracity of rumours which have circulated since the end of 2011 regarding the CFA devaluation. We use the analytical framework by Combes and Plane (2007) and Couharde et al. (2011) to calculate the equilibrium real effective exchange rate as well as the percentage of CFA misalignment compared to this equilibrium value. Over the 2001-2011 period, we confirm the tendency to a CFA overvaluation which has fueled rumours. In 2011, half of the franc zone countries (Benin, Burkina Faso, Congo, Guinea Bissau, Equatorial Guinea, Mali and Niger) were in a situation of real overvaluation. However, we conclude that there is no need for an immediate devaluation of the CFA franc as the misalignment is not very important and the shock would have adverse effects on the economies as it had during the 1994 devaluation. Moreover, the tendency to the overvaluation is likely to continue because of the weak economic performances in Europe. It should lead the monetary authorities of the franc zone to wonder about the future of their fixed exchange rate regime, which ties their hands to the uncertain future of the eurozone. This paper recommends the adoption of fixed but adjustable exchange rate regime with specific, transparent rules, which are well-known in advance.

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