The Franc Zone as a Restraint

Abstract

The CFA Franc Zone has been seen as a potential model for promoting macroeconomic stability in African countries where purely domestic agencies of restraint are often absent and where purely external agencies of restraint, like donor conditionality, have shown their limitations.1 The CFA arrangements consist of two monetary unions, each with a supranational central bank that issues a currency that is pegged to the French franc and for which convertibility is guaranteed by the French Treasury. Each union has a largest state which makes up approximately half of union GDP (Cameroon in the BEAC zone and Cote d’Ivoire in UMOA).2 In addition to their commitment to defend the peg to the French franc, the central banks are armed with two monetary policy rules designed to prevent excess central bank financing of government deficits and to preserve a minimum level of foreign reserves. In practice, the states of the Franc Zone have succeeded in maintaining a significant degree of monetary discipline, but low inflation has not been accompanied by the sort of fiscal discipline which the Zone’s supranational central banks and relationship with France could also promote. The central question I ask in this chapter is what are the weaknesses of the system that could have promoted fiscal discipline in the Franc Zone, can they be rectified, and what implications might be drawn for the establishment of similar agencies of restraint in African countries more generally?3