What is the CFA Franc
The CFA franc is one of two regional African currencies backed by the French treasury with pegging to the euro. CFA franc can refer to either the Central African CFA franc, abbreviated XAF in currency markets, or the West African CFA franc, abbreviated XOF in currency markets. Although they are separate currencies, the two are effectively interchangeable as they hold the same monetary value against other currencies. In theory, however, the French government or the monetary unions using the currencies could decide to change the value of one or the other.
BREAKING DOWN CFA Franc
The term CFA has had a few meanings over the years. Between 1945 and 1958 CFA stood for "colonies françaises d'Afrique," referring to former African colonies of France. Between 1958 and the independence of the nations using the CFA in the early 1960s stood for "communauté françaises d'Afrique" (French Community of Africa). Finally, after independence and to this day it stands for "Communauté financière d'Afrique" (African Financial Community) in the West African Economic and Monetary Union and “Coopération Financière en Afrique Centrale” in the Central African Monetary Union.
The two monetary unions in the CFA franc zone currently consist of 14 sub-Saharan African nations. The West African Economic and Monetary Union, founded in 1994, contains Benin, Burkina Faso, Côte D’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. The Central African Economic and Monetary Union consists of Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon.
According to World Bank data, the Central African Republic experiences 6.4% annual inflation and has a gross domestic production (GDP) of 4.5%, as of 2016, which is the most current year of available data.
History of the CFA Franc
Creation of the CFA franc was in 1945, following the end of the Second World War. Previously, French colonies had their currencies pegged to the French franc. However, changes made by the signing of the Bretton Woods Agreement, ratified in 1945, pegged the French franc to the dollar, which devalued the French Franc. France created the new currency to avoid devaluing the money in its colonies.
The initial exchange rate in 1945 was 1 CFA franc to 1.70 French francs. In 1948, the rate changed to 1 CFA franc to 2 French francs after the devaluation of the French franc. This artificially high exchange rate for the CFA franc caused economic stagnation among the countries in the CFA franc zone in the 1980s and early 1990s. In consultation with France and the International Monetary Fund, the African monetary unions decided to devalue their currencies by 50 percent, which, along with other fiscal and monetary policy adjustments, generated GDP growth of 5 percent in the CFA franc zone between 1995 and 2000.
When France switched from the franc to the euro, the currencies retained parity, so the currencies currently trade at 100 CFA franc to 0.152449 euro.