## Box 1.1 and Box 1.2 — The CFA Franc Zone: Historical Origins, Institutional Setting, and the 1994 Devaluation

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---

### History and institutional origins
- Predecessors of the CFA franc arrangement date back to colonial times when currency was issued in dependent territories to avoid transporting cash.
- After World War II two “issuance houses” remitted currency for the French colonies in Africa.
- In the run-up to independence these institutions were renamed Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO) and Banque Centrale des Etats de l’Afrique Centrale et du Cameroun (BCEAC).
- Conventions concluded in 1962 and updated in 1973 (with the BCEAO) and in 1972 (with the BCEAC) created formal central banks, reduced the role of France, and created African leadership in the institutions.
- The BCEAC was renamed Banque des Etats de l'Afrique Centrale (BEAC).
- In the late 1970s headquarters were relocated from Paris to Africa: BCEAO to Dakar, Senegal, and BEAC to Yaoundé, Cameroon.

### Membership and demographic/economic profile
- Historical membership: all French colonies in sub-Saharan Africa were members of the broad franc zone, with northern Africa former French colonies and countries such as Guinea (1958), Madagascar (1972), and Mauritania (1973) leaving to introduce their own currencies.
- Current principal members: France and two African economic and monetary unions:
  - CEMAC (BEAC as central bank): Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, Gabon. (Equatorial Guinea joined in 1985.)
  - WAEMU (BCEAO as central bank): Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo. (Guinea-Bissau joined in 1997.)
- Key statistics and heterogeneity:
  - The 14 African countries in the CFA franc zone account for nearly one-third of all sub-Saharan Africa states.
  - Total population: 123 million.
  - This population equals 17 percent of the population of sub-Saharan Africa.
  - The CFA franc zone accounts for about 15 percent of Africa’s GDP and produces 22 percent of its oil.
  - WAEMU has more than double the population of CEMAC but its average per capita income in 2006 was less than half the CEMAC level.
  - Per capita incomes in CEMAC range from less than $400 in the Central African Republic to more than $7,000 in Equatorial Guinea.
  - Per capita incomes in WAEMU range from about $200 in Guinea-Bissau to slightly less than $1,000 in Côte d’Ivoire.

### Main institutional and operational arrangements
- The arrangement links three currencies: the CFA francs issued separately by each bank, and the euro.
  - Both CFA francs are fixed to the euro (previously to the French franc) at the same rate, 655.957 per euro.
  - The CFA francs are issued by two distinct central banks and are independent of each other.
  - Each CFA franc is nominally convertible into the euro, but they are not directly convertible into each other.
- France’s role and safeguard arrangements:
  - France guarantees the peg of the CFA franc to the euro.
  - France provides an operations account in the French Treasury for each of the two central banks, on which they may draw in case of reserve shortages.
  - Institutional safeguards and restrictions:
    - At least 20 percent of sight liabilities of each central bank must be covered by foreign exchange reserves.
    - At least 50 percent of foreign exchange reserves must be held in the operations account. (Previously the required level was 65 percent. In the case of CEMAC, the new level will be phased in through 2008.)
    - Increasing interest rate penalties apply if there is an overdraft.
  - France is represented on the board of both institutions.
- Regional central bank responsibilities and differences:
  - Within the fixed exchange rate limits, BEAC and BCEAO conduct monetary policy and implement banking supervision in their regions.
  - Differences in the speed of policy and policy instrument reform between the two banks have led to differences in financial depth, the array of tools available, and the autonomy of each central bank.
- Post-1994 reforms:
  - After the 1994 devaluation unions initiated efforts to speed up economic and financial integration, inspired by EU institutional and legal arrangements; current “second generation reforms” include creation of regional infrastructure and strengthening regional institutions.

### Devaluation event (Box 1.2)
- Effective January 12, 1994, the CFA francs of CEMAC and WAEMU were both devalued by 50 percent.
- The devaluation was the sole adjustment and a very large one in almost 60 years; it marks a watershed in the operation of the regime.

### Economic pressures preceding the devaluation
- From the mid-1980s members experienced loss of competitiveness driven by:
  - A prolonged deterioration in the terms of trade.
  - A substantial appreciation of the French franc against currencies of major trading partners (especially during 1984–90).
  - Structural rigidities such as high wages and poorly managed banking systems.
  - Eroding tax bases, increased fiscal transfer demands, worsening government deficits, accumulation of arrears that crowded out the private sector, and further weakening of banking systems.

### Preparation, implementation, and immediate aftermath
- IMF and World Bank analyzed CFA franc overvaluation from the late 1980s; discussions involved African monetary union members, France, and the IMF.
- Coordination and secrecy were required; the decision was taken in early 1994 during a meeting officially held to discuss a jointly operated airline.
- Immediately after the devaluation most affected countries agreed on IMF– and World Bank–supported programs to implement far-reaching policy reforms.
- Post-devaluation the region implemented a plan to enhance economic convergence and create common markets.
- Economic impact: the devaluation is generally judged successful, widely credited with restoring internal and external balance, and led to a reflow of capital into the zone. Assessments show part of competitiveness gains persist.

### Current situation (differences from 1994) and main challenges
- Differences from 1994:
  - Movements between the euro and the U.S. dollar, and domestic wage developments, have led to a loss in competitiveness in both zones; terms of trade effects differed between CEMAC and WAEMU.
  - Less severe current account pressures (for CEMAC, significant surpluses).
  - Capital inflows.
  - Better fiscal performance.
  - Reserve levels well above minimum levels.
- Main challenges going forward (three broad, distinct challenges):
  1. Maintain fiscal and monetary policies that avoid pressures on the peg and keep debt sustainable.
  2. Build capacity to adjust to changing external conditions, with economic systems flexible enough to absorb shocks and avoid one-sided imbalances.
  3. Speed up integration and raise growth potential by deriving more benefits from regional trade and financial integration and agreeing on a common roadmap for structural reforms.

### Policy experience, institutional assessment, and empirical evidence
- General assessment:
  - The CFA franc system delivered macroeconomic stability benefits, notably low and stable inflation, and stimulated institutional development.
  - Concerns focus on costs of rigidities associated with a fixed exchange rate given vulnerability to major shocks.
- Empirical literature on nominal exchange rate regimes:
  - Fixed exchange rates lead to lower inflation and more fiscal discipline.
  - Direct effects on growth vary across studies and are mostly not statistically significant.
  - For the CFA franc zone specifically, benefits for lower inflation are confirmed by Masson and Pattillo (2004).
- Institutional strengths and weaknesses:
  - The two central banks are relatively transparent and efficient and compare favorably with other institutions in sub-Saharan Africa.
  - National authorities have often failed to fully implement regional macroeconomic policies and market-oriented reforms; noncompliance with regional convergence criteria has been common.
  - Regional integration is limited in practice: low trade between unions, separate external tariffs, restricted capital flows between zones, prohibition on exchange of banknotes, and suspended direct convertibility between the two currencies since shortly before the devaluation.

### Sustainability of macroeconomic policies and chapter overviews
- Monetary policy and liquidity:
  - Chapter 2 (CEMAC): significant and growing excess liquidity in the banking system; money growth is a determinant of inflation; limited capital mobility creates scope for more active monetary policy and sterilization; structural improvements in government cash management are recommended.
  - Chapter 3 (WAEMU): money supply contributes to price changes but is not the sole long-run determinant of inflation; supply constraints in agriculture and exchange rate pass-through are significant.
- Fiscal policy:
  - Chapter 4: fiscal policy largely driven by national considerations; fiscal efforts influenced by stock of outstanding debt, growth, per capita GDP, terms of trade, and openness; past fiscal performance strongly influences current policy, suggesting possible bias toward procyclical fiscal policy; regional convergence criteria may be insufficient—supplementary fiscal-related criteria are recommended.
- Reserve adequacy:
  - Chapter 5: despite the French convertibility guarantee, both unions prefer to avoid activating the guarantee; reserve adequacy should be measured against traditional indicators; at present reserves are adequate in both CEMAC and WAEMU; any changes to arrangements (including use of funds for future generations in CEMAC) must remain consistent with keeping reserves adequate.

### Capacity to adjust to external conditions (Chapter 6 overview)
- Chapter 6 (CEMAC and WAEMU real effective exchange rates, 1970–2005) findings:
  - The fundamentals-equilibrium exchange rate (FEER) approach and Johansen cointegration methodology indicate fundamentals drove most movements in time-varying equilibrium exchange rates.
  - Factors pushing toward appreciation: increases in the terms of trade, government consumption, and productivity improvements.
  - Factors pushing toward depreciation: increases in investment and openness.
  - At end-2005, real effective exchange rates in both CEMAC and WAEMU were broadly in line with their long-run equilibrium values.
  - Significant differences exist between WAEMU and CEMAC in the marginal impact of fundamentals and the speed of reversion to equilibrium after a shock.

### Competitiveness, integration, and growth — key findings and policy implications (overview of subsequent chapters)
- Competitiveness (Ramirez and Tsangarides):
  - Real exchange rate alone is not a sufficient indicator of competitiveness; competitiveness requires assessment of “environment” and “policy” criteria (productivity, labor market, prices and costs, macroeconomic performance, business environment, governance, technology, infrastructure).
  - Despite some improvements, competitiveness challenges are mainly structural; a change in relative prices alone would not have a lasting impact.
  - Policy recommendation: undertake structural reforms to improve productivity, reduce factor costs, and create a supportive business, legal, and political environment to attract and diversify economic activity.
- Monetary and economic integration (Qureshi and Tsangarides, Chapter 8):
  - Clustering analysis raises questions about current and proposed monetary union boundaries; significant heterogeneities within the CFA franc zone; WAMZ countries do not cluster with WAEMU; similarities exist between CEMAC and WAMZ.
- Financial sector and retail banking integration (Chapters 9–10):
  - Financial integration is well advanced in some respects (high common and foreign ownership of banks, more cross-border government securities transactions, common regulations).
  - Shortfalls: persistent deviations from the law of one price, few cross-border bank transactions, differentiated application of monetary instruments across countries.
  - Retail banking in CEMAC shows some price convergence in interest spreads but no increase in cross-border retail flows; competition is limited and price convergence may reflect excess liquidity.
  - Policy implication: measures needed to achieve greater financial convergence and related growth benefits; facilitate regional integration and address legal, regulatory, infrastructure, and market shortfalls.
- Growth and convergence (Chapter 11):
  - Neither WAEMU, CEMAC, nor the CFA zone as a whole is growing faster than sub-Saharan Africa or other subregions.
  - Low inflation in the two monetary unions has had a greater positive impact on growth than in sub-Saharan Africa as a whole.
  - Improvements in investment and policy variables have contributed less to growth in WAEMU/CEMAC than in the fastest growing countries.
  - Policy implication: deepen regional integration and reduce domestic constraints on investment, diversification, and growth.
- Trade integration and reform (Chapters 12–13):
  - Since the devaluation, efforts to facilitate regional trade are central to integration.
  - CEMAC reform agenda: eliminate nontariff barriers, improve application of customs union, major improvements in regional transportation infrastructure, consider reducing tariffs against the rest of the world, and complement tariff reform with mobilization of more domestic revenue.
  - WAEMU regime: poor transportation infrastructure and incomplete implementation of agreed trade regime hamper trade potential; plans to extend WAEMU customs union to ECOWAS and conclude an EPA with the EU; tariff reductions have trade creation effects but need domestic revenue mobilization.

### Findings, outlook, and emergent policy priorities
- The CFA franc arrangement enjoys strong political and popular support but its successful operation requires stringent conditions given vulnerability to shocks:
  - Considerable macroeconomic discipline.
  - A high degree of market flexibility.
- Current shortcomings: not all prerequisites are in place; design shortcomings in common institutions and policies; common policies often not implemented with sufficient vigor and consistency.
- Policymakers recognize need for reform to draw more economic benefits from monetary and economic union.
- Emergent themes and priorities:
  - More depth before further widening: deepen trade and financial links among current members before expansion; sequence reforms to create preconditions for deepening economic links.
  - More and better markets: eliminate obstacles to regional goods and factor markets (goods, capital, labor) to reduce shock severity and harness common economic space benefits.
  - Greater consistency between national and regional policies: align national policies with regional policies, including tax harmonization and domestic revenue mobilization.
  - More balanced development across the CFA franc zone: reduce barriers between WAEMU and CEMAC (trade, capital, labor mobility) and make underlying economic structures flexible to ensure regime sustainability under differing shocks.

*Source: Box 1.1 and Box 1.2, The CFA Franc Zone: Historical Origins and Current Institutional Setting; The CFA Franc Devaluation, _chap1_.*

### Box 1.1. The CFA Franc Zone: Historical Origins and

### Box 1.1. The CFA Franc Zone: Historical Origins and Current Institutional Setting

### History
- The predecessors of the CFA franc arrangement date back to colonial times when currency was issued in dependent territories to avoid transporting cash.
- At the end of World War II, two “issuance houses” remitted currency for the French colonies in Africa.
- In the run-up to independence these institutions were renamed Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO) and Banque Centrale des Etats de l’Afrique Centrale et du Cameroun (BCEAC).
- Conventions concluded in 1962 and updated in 1973 (with the BCEAO) and in 1972 (with the BCEAC) created formal central banks, reduced the role of France, and created African leadership in the institutions.
- The BCEAC was renamed Banque des Etats de l'Afrique Centrale (BEAC).
- In the late 1970s headquarters were relocated from Paris to Africa: BCEAO to Dakar, Senegal, and BEAC to Yaoundé, Cameroon.

### Membership
- Historically, all French colonies in sub-Saharan Africa were members of the broad franc zone.
- Former French colonies in northern Africa left the arrangement to introduce their own currencies, as did Guinea (1958), Madagascar (1972), and Mauritania (1973).
- Current principal members of the CFA franc zone are France and two African economic and monetary unions:
  - Central African Economic and Monetary Community (CEMAC) with the BEAC as its central bank. CEMAC has six members: Cameroon, the Central African Republic, Chad, the Republic of Congo, Equatorial Guinea, and Gabon. (Equatorial Guinea joined in 1985.)
  - West African Economic and Monetary Union (WAEMU) with the BCEAO as the central bank. WAEMU has eight members: Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. (Guinea-Bissau joined in 1997.)

### Main institutional and operational arrangements
- The CFA franc zone links three currencies: the CFA francs issued separately by each bank, and the euro.
  - Both CFA francs are fixed to the euro (previously to the French franc) at the same rate, 655.957 per euro.
  - The CFA francs are issued by two distinct central banks and are independent of each other.
  - Each CFA franc is nominally convertible into the euro, but they are not directly convertible into each other.
- France guarantees the peg of the CFA franc to the euro.
  - France provides an operations account in the French Treasury for each of the two central banks, on which they may draw in case of reserve shortages.
  - While theoretically this amounts to a possibly unlimited overdraft, institutional safeguards and restrictions exist:
    - At least 20 percent of sight liabilities of each central bank must be covered by foreign exchange reserves.
    - At least 50 percent of foreign exchange reserves must be held in the operations account.
    - Increasing interest rate penalties apply if there is an overdraft.
  - France is represented on the board of both institutions.
- Within the limits of the fixed exchange rate arrangement, the BEAC and BCEAO are responsible for the conduct of monetary policy in their respective regions and for implementing banking supervision at the regional level.
  - Differences in the speed of policy and policy instrument reform between the two banks have led to differences in financial depth and in the array of tools available to the two central banks and to the autonomy of each central bank.
- After the 1994 devaluation the unions initiated efforts to speed up economic and financial integration within the subregions.
  - These efforts were largely inspired by the institutional and legal arrangements of the EU and are intended to coordinate macroeconomic policies and create a common market.
  - The current “second generation reforms” include the creation of regional infrastructure and strengthening of regional institutions.

### Footnotes (as in source)
- The BCEAO issues the Franc de la Communauté Financière de l’Afrique (CFA); the BEAC issues the Franc de la Coopération Financière Africaine (CFA).
- Previously the required level was 65 percent. In the case of CEMAC, the new level will be phased in through 2008.

*Source: Box 1.1, The CFA Franc Zone: Historical Origins and Current Institutional Setting.*

### Box 1.2. The CFA Franc Devaluation

### Box 1.2. The CFA Franc Devaluation

### Devaluation event
- Effective January 12, 1994, the CFA francs of CEMAC and WAEMU were both devalued by 50 percent.
- The devaluation was the sole adjustment and a very large one in almost 60 years; it marks a watershed in the operation of the regime.

### Economic pressures preceding the devaluation
- From the mid-1980s, members of the CFA franc zone experienced loss of competitiveness.
- Key shocks and structural weaknesses:
  - A prolonged deterioration in the terms of trade.
  - A substantial appreciation of the French franc against currencies of major trading partners (especially during 1984–90).
  - Structural rigidities such as high wages and poorly managed banking systems.
  - Eroding tax bases, increased fiscal transfer demands, worsening government deficits, accumulation of arrears that crowded out the private sector, and further weakening of banking systems.

### Preparation and implementation
- The IMF and the World Bank analyzed CFA franc overvaluation from the late 1980s; discussions on exchange rate adjustment involved African monetary union members, France, and the IMF.
- Coordination and secrecy were required; the decision was taken in early 1994 during a meeting officially held to discuss a jointly operated airline.
- Immediately after the devaluation, most affected countries agreed on IMF– and World Bank–supported programs to implement far-reaching policy reforms.
- Post-devaluation, the region put in place a plan to enhance economic convergence and create common markets.

### Economic impact
- The devaluation is generally judged successful and is widely credited with restoring internal and external balance.
- It led to a reflow into the zone of capital that had left in anticipation of the exchange rate change.
- Assessments of the equilibrium exchange rate in both zones show that part of the competitiveness gains from the devaluation persists.

### Current situation and differences from 1994
- Movements between the euro and the U.S. dollar, and domestic wage developments, have led to a loss in competitiveness in both zones; terms of trade effects differed between CEMAC and WAEMU.
- Marked differences from 1994 include:
  - Less severe current account pressures (for CEMAC, significant surpluses).
  - Capital inflows.
  - Better fiscal performance.
  - Reserve levels well above minimum levels.
- Addressing structural obstacles to competitiveness remains key to longer-term non-oil growth.

### Economic characteristics of the CFA franc zone
- The 14 African countries in the CFA franc zone account for nearly one-third of all sub-Saharan Africa states.
- Total population: 123 million.
- This population equals 17 percent of the population of sub-Saharan Africa.
- The CFA franc zone accounts for about 15 percent of Africa’s GDP and produces 22 percent of its oil.
- Heterogeneity:
  - WAEMU has more than double the population of CEMAC but its average per capita income in 2006 was less than half the CEMAC level.
  - Per capita incomes in CEMAC range from less than $400 in the Central African Republic to more than $7,000 in Equatorial Guinea.
  - Per capita incomes in WAEMU range from about $200 in Guinea-Bissau to slightly less than $1,000 in Côte d’Ivoire.
- Production structure differences:
  - CEMAC: several petroleum exporters (Chad, Equatorial Guinea, Gabon, Cameroon, Republic of Congo).
  - WAEMU: predominantly agricultural exports, particularly cotton; only one WAEMU country (Côte d’Ivoire) produces oil.
- WAEMU has more advanced internal trade and deeper financial markets (e.g., creation of treasury bills) than CEMAC.

### Policy experience and institutional assessment
- General view: the CFA franc system has delivered macroeconomic stability benefits, notably low and stable inflation, and has stimulated institutional development.
- Concerns center on costs of rigidities associated with a fixed exchange rate given vulnerability to major shocks (e.g., falls in cotton prices).
- Empirical literature on nominal exchange rate regimes suggests:
  - Fixed exchange rates lead to lower inflation and more fiscal discipline.
  - Direct effects on growth vary across studies and are mostly not statistically significant.
- For the CFA franc zone specifically, benefits for lower inflation are confirmed by Masson and Pattillo (2004).
- Institutional strengths: the two central banks are relatively transparent and efficient and compare favorably with other institutions in sub-Saharan Africa.
- Nonetheless, national authorities have often failed to fully implement regional macroeconomic policies and market-oriented reforms; noncompliance with regional convergence criteria has been common.
- Regional integration is limited in practice: low trade between unions, separate external tariffs, restricted capital flows between zones, prohibition on exchange of banknotes, and suspended direct convertibility between the two currencies since shortly before the devaluation.

### Main challenges going forward
- The region faces three broad, distinct challenges:
  1. Maintain fiscal and monetary policies that avoid pressures on the peg and keep debt sustainable.
  2. Build capacity to adjust to changing external conditions, with economic systems flexible enough to absorb shocks and avoid one-sided imbalances.
  3. Speed up integration and raise growth potential by deriving more benefits from regional trade and financial integration and agreeing on a common roadmap for structural reforms.

### Sustainability of macroeconomic policies (overview of related chapters)
- Monetary policy and liquidity:
  - Chapter 2 (CEMAC): significant and growing excess liquidity in the banking system; money growth is a determinant of inflation; limited capital mobility creates scope for more active monetary policy and sterilization; structural improvements in government cash management are recommended.
  - Chapter 3 (WAEMU): money supply contributes to price changes but is not the sole long-run determinant of inflation; supply constraints in agriculture and exchange rate pass-through are significant.
- Fiscal policy:
  - Chapter 4: fiscal policy largely driven by national considerations; fiscal efforts influenced by stock of outstanding debt, growth, per capita GDP, terms of trade, and openness; past fiscal performance strongly influences current policy, suggesting possible bias toward procyclical fiscal policy; regional convergence criteria may be insufficient—supplementary fiscal-related criteria are recommended.
- Reserve adequacy:
  - Chapter 5: despite the French convertibility guarantee, both unions prefer to avoid activating the guarantee; reserve adequacy should be measured against traditional indicators; at present reserves are adequate in both CEMAC and WAEMU; any changes to arrangements (including use of funds for future generations in CEMAC) must remain consistent with keeping reserves adequate.

### Capacity to adjust to external conditions (overview of related chapter)
- Chapter 6 (CEMAC and WAEMU real effective exchange rates, 1970–2005):
  - The fundamentals-equilibrium exchange rate (FEER) approach and Johansen cointegration methodology indicate that fundamentals drove most movements in time-varying equilibrium exchange rates.
  - Factors pushing toward appreciation: increases in the terms of trade, government consumption, and productivity improvements.
  - Factors pushing toward depreciation: increases in investment and openness.
  - At end-2005, real effective exchange rates in both CEMAC and WAEMU were broadly in line with their long-run equilibrium values.
  - There are significant differences between WAEMU and CEMAC in the marginal impact of fundamentals and the speed of reversion to equilibrium after a shock.

*Source: Box 1.2, _chap1 - Box 1.2. The CFA Franc Devaluation_*

### Chapter  7,  Ramirez  and  Tsangarides  examine  a  range  of  issues  related  to

### Overview

### Competitiveness
- Ramirez and Tsangarides argue that the real exchange rate alone is not a sufficient indicator of competitiveness.
- They propose a broader framework that examines competitiveness based on “environment” and “policy” criteria.
- Determinants include indicators of productivity and labor market conditions, prices and costs, macroeconomic performance, the business environment, governance, and technology and infrastructure.
- Findings:
  - Despite some recent improvements—particularly in CEMAC—competitiveness challenges are mainly structural when compared to peer countries in both regions.
  - With the existing constellation of conditions, an adjustment in relative prices—for example, a devaluation—would not have a lasting impact on the unions’ competitiveness.
- Policy recommendation:
  - Undertake structural reforms to improve productivity, reduce factor costs, and create a supportive business, legal, and political environment to attract and diversify economic activity.

### Monetary and economic integration
- Monetary and economic integration efforts in Central and West Africa remain in flux.
- Possible new constellations could complement or replace current regional arrangements in the context of the West African Monetary Zone (WAMZ) or the Economic Community of West African States (ECOWAS), possible entrance of a new member country to CEMAC, or regional effects of the planned Economic Partnership Agreements (EPAs) with the EU.
- Qureshi and Tsangarides (Chapter 8) use clustering analysis on variables suggested by the convergence criteria and the theory of optimal currency areas to reconsider the optimal composition of country groupings.
- Findings:
  - Results raise questions about the geographical boundaries of several current and proposed monetary unions.
  - There are significant heterogeneities within the CFA franc zone as it now exists.
  - The WAMZ countries do not form a cluster with the WAEMU countries.
  - There are similarities between CEMAC and WAMZ countries.
  - Within the WAMZ, there is a significant lack of homogeneity.

### Integration and Growth
- The final set of papers examines long-term prospects, the level of integration achieved, and whether institutional and structural conditions in the CFA franc zone allow for deeper integration and higher growth.
- Financial sector integration (Chapter 9, Sy):
  - The structure of the financial sector and institutional arrangements indicate financial integration is in some respects well advanced.
  - Examples: common and foreign ownership of banks is very high; cross-border transactions in government securities have become more frequent; common regulations and a regional supervisor foster similarity in rules and their application.
  - Shortfalls:
    - Persistent deviations from the law of one price.
    - Few cross-border bank transactions.
    - The central bank differentiates in how it applies certain monetary policy instruments, such as legal reserve ratios, to member countries.
  - Policy implication: Policy measures might be needed to achieve greater financial convergence and related growth benefits.
- Retail banking integration in CEMAC (Chapter 10, Saab and Vacher):
  - Using quantitative and qualitative indicators, they find some evidence of price convergence in average interest rate spreads.
  - No increase in actual cross-border flows for retail loans and deposits.
  - Price convergence may be a symptom of excess liquidity rather than regional competition.
  - Empirical tests show bank competition within CEMAC is very limited.
  - Policy proposals: Facilitate regional integration and address shortfalls in legal and regulatory frameworks, infrastructure, and markets.
- Growth and convergence (Chapter 11, Pattillo, Tsangarides, and van den Boogaerde):
  - Use quantitative measures of convergence and recent growth robustness exercises to compare WAEMU and CEMAC with sub-Saharan Africa and other subregional arrangements.
  - Findings:
    - Neither WAEMU, CEMAC, nor the CFA zone as a whole is growing faster than the whole of sub-Saharan Africa or the other subregions.
    - Low inflation in the two monetary unions has had a greater positive impact on growth than it has for sub-Saharan Africa as a whole.
    - Improvements in investment and policy variables that are robust growth determinants have not contributed as much to growth improvements in WAEMU or CEMAC as in the fastest growing countries in sub-Saharan Africa.
  - Policy implication: Need to deepen regional integration further and reduce domestic constraints on investment, diversification, and growth.
- Trade integration and reform (Chapter 12, Martjin and Tsangarides; Chapter 13, Goretti and Weisfeld):
  - Since the devaluation, efforts to facilitate regional trade have been under way and are seen as the cornerstone of regional integration.
  - CEMAC trade reform agenda:
    - Eliminating nontariff barriers and other obstacles to intraregional trade that violate regional agreements will require renewed political commitment to regional integration.
    - Problems in applying the customs union and major improvements needed in regional transportation infrastructure must be addressed before the region can fully benefit.
    - There is a solid case for reducing tariffs against the rest of the world, with or without an EPA with the EU.
    - Trade liberalization would help boost economic growth and alleviate poverty and would limit risks of possible trade diversion from an EPA.
    - Given continued heavy reliance on trade-related taxes, tariff reform would need to be complemented by mobilization of more domestic revenue.
  - WAEMU trade regime:
    - Achieving full trade potential is hampered by poor transportation infrastructure and incomplete implementation of the agreed trade regime, partly owing to national authorities’ competitiveness concerns.
    - Reform agenda includes plans to extend the WAEMU customs union to ECOWAS and to conclude an EPA with the EU.
    - Tariff reduction associated with these initiatives is likely to have important trade creation effects but will need to be complemented by improvements in domestic revenue mobilization.
    - Further trade liberalization on a most-favored-nation basis would contribute to economic growth and poverty alleviation while limiting risks of trade diversion from an ECOWAS customs union and an EPA.

### Findings and Outlook
- The CFA franc arrangement enjoys strong political and popular support.
- Requirements for continued successful operation of the regime are stringent given member countries’ vulnerabilities to shocks:
  - Considerable macroeconomic discipline.
  - A high degree of market flexibility.
- Current shortcomings:
  - Not all prerequisites are in place.
  - Some shortcomings in the design of common institutions and policies.
  - Common policies are often not implemented with sufficient vigor and consistency.
- Policymakers recognize the need for reform to allow the region to draw more economic benefits from monetary and economic union.
- Common trends and weaknesses point to priority areas for change.
- Emergent themes and priorities:
  - More depth before further widening.
    - Trade and financial links among current members lack depth.
    - Structural policies to deepen these links have been insufficient.
    - Administrative and other bottlenecks are likely to become more severe with premature expansion, and immediate positive returns would be few.
    - Proper sequencing of reform efforts should begin with creating economic, political, and structural preconditions for deepening current economic links.
  - More and better markets.
    - In a monetary union, imbalances should resolve through flows of goods, capital, and labor.
    - Internal trade and capital flows in both subzones continue to be subject to informal restrictions; labor mobility suffers from too many limitations.
    - Priority should be eliminating obstacles to the unfettered play of regional goods and factor markets to reduce the severity of shocks and draw stability benefits from the common economic space.
  - Greater consistency between national and regional policies.
    - Obstacles to integration arise from national policies inconsistent with regional policies and from a lack of national reform efforts (for example, in relation to tax harmonization or domestic revenue mobilization).
    - Consistency is needed both in spirit and letter of regional policies.
  - More balanced development in the CFA franc zone as a whole.
    - Through the common peg to the euro CEMAC and WAEMU essentially share a currency, yet economic structures and developments in the two unions are increasingly diverging.
    - To preserve benefits of a common currency, more attention to achieving balanced developments in the two unions will be needed.
    - Actions could include reducing barriers between WAEMU and CEMAC (for example, through improved trade, or capital and labor mobility in the larger zone) and making underlying economic structures sufficiently flexible to ensure regime sustainability when economic conditions and shocks differ.

*Italicized source attribution: Chapter 7 and Overview material from the supplied IMF chapter content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/nft/books/2008/cfazone/_chap1.pdf_