From its obscure years of trading at less than a kobo to 1 CFA Franc in 1986, the CFA Franc has risen tremendously in value and now trades at around 54 kobo to 1 CFA Franc.
In the last 5 years, the CFA Franc is up roughly 80 percent against the Naira. A similar move over the next 5 years could see the CFA Franc finally reach parity.
CFA Franc is the official currency of many francophone countries in Africa within the West African and Central African region. There are two types of CFA Franc, the West African CFA Franc and the Central African CFA Franc. Both currencies are backed by the French treasury and although separate in theory, they can be used interchangeably for trade.
The currency codes are XOF for the West African CFA franc which is used by eight West African Countries and XAF for the Central African CFA franc which is the national currency of six Central African countries.
The eight members of the West African Economic and Monetary Union (WAEMU) who use the CFA Franc are Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo. While for the six members of the Central African Economic and Monetary Community (CAEMC) are Cameroon, Central African Republic, Republic of the Congo, Gabon, Equatorial Guinea and Chad.
CFA Franc was formerly pegged to the French Franc but after the French Franc was replaced by the Euro, CFA Franc has been pegged to the Euro at 1 CFA for 0.15 euro. The CFA Franc is backed by the French treasury and the francophone countries have had to give up their monetary policy to the European Central Bank in order to tie their currency to the Euro. The benefit of this policy has been years of low inflation rate and low interest rate.
The disadvantage is that the strength of the Euro and subsequently the CFA Franc has made the francophone countries less competitive than Nigeria and Ghana according to Wale Okurinboye, Head, Investment Research at Sigma Pensions. He added that as Naira has continued to weaken over the years, Nigerian businesses have taken advantage of the stronger currencies in the neighbouring countries to push cheaper exports into these countries.
In 2017, Nigeria exported more than N115 billion worth of goods to Economic Community of West African States (ECOWAS) countries while it imported only about N28.60 billion from them, thereby posting a trade surplus of almost N90 billion against its neighbours.
The relatively strong currency of the West African neighbours is a major driver for the demand of Nigerian goods in these countries but this currency stability has also made imports from Europe, China and America inexpensive.
In 2013, David Adulugba, then Chief Executive Officer of the Nigerian Export Promotion Council said that although Nigeria exports have penetrated the francophone markets, France still remains their biggest trading partner.
The peg between CFA Franc and Euro makes francophone countries a natural destination for France exports.
Compared to the high inflationary environment in Nigeria and Ghana, prices of manufactured products in Europe keep reducing which makes Nigeria less competitive than their French counterparts in this market. Okurinboye also said that due to the poor state of transportation networks between Nigeria and the francophone countries, Chinese imports which ought to be more expensive than Nigerian imports are not as goods transportation costs raise prices of Nigerian imports for the French speaking countries.
ECOWAS reported that inter-regional trade in 2017 was just 12 percent of total ECOWAS trade. ECOWAS target is to increase inter-regional trade to 50% by 2021. This could be achieved by placing higher tariffs on foreign imports and improving market access for and between ECOWAS countries. This could be a big opportunity for Nigerian businesses to take advantage of this favourable policy by further diversifying their export destination and driving sales in West Africa.
Whether Nigeria chooses to enter into a monetary union with other ECOWAS countries or maintain the current monetary system, analysts expect that Nigeria will continue to preserve its competitive advantage over the francophone countries in terms of pricing and production efficiency.