CFA: The Devaluation Dividend
ALMOST a year ago on 12 January 1994, 13 countries of the Franc zone were pushed into a massive and unprecedented devaluation. The CFA currency still tied to the French Franc was, at a stroke, reduced in value by 50%. This situation was forced on Francophone Africa by the World Bank and IMF which insisted that their currencies had become grossly overvalued causing massive misallocation of resources.
This brought a wave of protest and shock. But the most dire protests were all to no avail. All Francophone African countries were faced with a surge of inflation, with strikes and protests by their unions and civil servants.
Yet now, a year later, the whole exercise is generally seen to be both necessary and as successful as could have been expected.
One of the curious consequences of the exercise which has received little comment is that the World Bank/IMF and France felt so guilty about their forced devaluation, that they have made massive loans and grants even to those countries which were not correctly carrying out their structural adjustment programmes. France cancelled almost all the debt that it was owed by 10 low income countries and 50% of the debt of middle income countries: Cameroon, Congo, Cote d'Ivoire and Gabon.
And the expected tidal wave of inflation has been much less serious than originally expected. Thanks to the Franc zone's tight monetary regime, inflation has averaged about 25% over the whole year, and it is now tailing off.
The Cote d'Ivoire Prime Minister Kablan Duncan, said recently that after surging in the first few months after devaluation, inflation had gradually slowed, rising in August by only 0.5%, even after dropping the general price freeze and allowing electricity and water rates to rise. Governments overall have managed to keep pay rises to below 15%.
Before devaluation, most Francophone countries were showing negative rates of growth, now positive growth has been restored. The Ivory Coast reports that even in 1994, a positive growth rate is expected compared with a year by year decline since 1987. Devaluation has boosted confidence and allowed a vigorous revival of economic activity as exports of all kinds have become far more competitive with Anglophone neighbours and other trading partners.
Local factories, which were virtually driven out of business by the overvalued CFA, have suddenly become competitive. In Senegal devaluation was such a beneficial shock to the manufacturing sector that more was produced in the first quarter of the year than in the whole of 1993. In Cameroon the boost to confidence was such that imports of capital equipment, vehicles and machinery is up by almost a third despite the increased cost of such items following devaluation. …