The depreciation of the euro against the US dollar is something of a double-edged sword for African countries that use the CFA franc as a currency of exchange.
The euro, launched in 2002, experienced a historic fall against the dollar on 12 July.
From now on, the two currencies have a unitary parity.
This has not happened for a very long time.
The weak growth prospects in the euro zone, the geopolitical issues linked to the war in Ukraine, monetary policies and speculation are among the reasons for this state of affairs.
This situation, although exogenous to the African continent, is not without consequences for some of its economies, particularly those that use the CFA franc.
This currency is in fact indexed to the European currency at a fixed parity (€1 ≃ 650 CFA francs).
The countries of the Franc Zone thus have the particularity of evolving in a system where their currencies (the XOF, the XAF and the Comorian Franc) have a purchasing power that does not vary in euro.
The depreciation of the latter in relation to the dollar mechanically leads to a loss of value for them in relation to the US currency.
To appreciate the consequences of this new deal, Patrick-Nelson Daniel Essiane, an economist and researcher at the Laboratory of Analysis and Research in Mathematical Economics (Larem) at the University of Yaoundé II, believes that it is important to keep in mind the structure of foreign trade of the countries concerned.
When one of these countries trades with a foreign country whose currency is different from its own, the Cameroonian economist explains, the two parties must agree on the conditions of the transaction: the quantity to be exchanged, the place of delivery, the deadline and the price.
To define the latter, he says, the two parties must agree on the currency that will appear on the contract.
International trade is moderated by the US dollar.
Exports of goods from developing countries are often denominated in this currency.
Contracts signed long before the rise of the US currency should therefore bring in more money for the same amount of goods sold.
“In economics, we would say that there is a price effect on the value of revenues. The exporter’s revenue increases when the currency in which the contract is denominated appreciates,” says Essiane.
In the same scenario, dollar holders can buy more shares, goods and services in a country using the euro or a currency that has a fixed exchange rate with it.
Their purchasing power will be greater in these countries after the depreciation of the euro, “which can potentially generate more business”.
Risk of inflation
While it is tempting to believe that the current situation is beneficial to Franc Zone countries, the economic expert points out that “nothing is that simple”.
African states import most of the goods and services they consume.
As the dollar is the currency of international trade, importers on the black continent will face an increase in their bill following the depreciation of the euro (and therefore the CFA franc).
“If on 15 July 2021 the importer bought 1 tonne of rice at 1000 dollars, the invoice in CFA francs would be 550,000 CFA francs. On the other hand, on 15 July 2022, this same ton of rice, at the same price of 1000 dollars, will cost him 655,000 CFA francs. If this importer has to resell this rice on the market and keep his profit margin, he will pass on this increase in the import price to the consumer. The result is more expensive rice on the market,” notes Patrick-Nelson Daniel Essiane.
According to him, this inflation is all the higher as the share of imports invoiced in a currency other than the euro is high and there is no local substitute for imported goods.
It should also be noted that with more inflation, the purchasing power of households whose incomes are not indexed to the evolution of prices would decrease further.
As the parity between the European currency and the CFA franc is fixed, this phenomenon could have been avoided if the importer had fixed the currency of the import contract in euros, he notes.
Public finances affected
Public finances will be particularly affected by this rise in the value of the dollar against the euro.
The appreciation of the US currency will increase the rent on raw material exports.
Budgetary revenues are also expected to increase due to potential additional activity.
At the same time, spending is expected to rise simply because imported goods paid for by governments (cars, office consumables, etc.) and subsidies for the consumption of imported goods (fuel, agricultural inputs, etc.) will become more expensive.
“If expenditure increases faster than revenue, this could increase the level of public debt. Similarly, the amount of CFA francs needed to repay the debt contracted in dollars will be higher,” says the Larem researcher.
In sum, the Cameroonian economist stresses, it is rather complex to draw a clear-cut conclusion on the phenomenon of the dollar’s appreciation.
The impact depends largely on the importance of trade denominated in this currency.
However, there is a significant risk to inflation.
A continued depreciation of the euro, with the current configuration of the trade structure, would considerably reduce the purchasing power of households for rather small gains in activity, he warns.
“The depreciation of the euro does and will create winners and losers. It will always depend on which side of the economic chessboard everyone is on,” Patrick-Nelson Daniel Essiane concludes.
The depreciation of the euro against the US dollar is a double-edged sword for African countries that use the CFA franc as a currency of exchange.
ARD/id/lb/as/APA