Wednesday morning 9th April 2021, El Salvador’s legislature voted in favor of President Nayib Bukele’s proposal for the Central American state to adopt bitcoin (read more). Bukele provided further details about his vision, pitched as an effort to boost financial inclusion in a country where almost 70% of El Salvador’s population lacks access to formal financial services.
This should indeed be good news for all of us and certainly a worthy initiative to be copied by the Francophone African countries using the CFA franc where almost 85% of the estimated adult population does NOT have access to the formal banking system.
Bitcoin, intended as an alternative to government-backed money, is based largely on complex math, data-scrambling cryptography — thus the term “cryptocurrency” — lots of processing power and a distributed global ledger called the blockchain, which records all transactions. No central bank or other institution has any say in its value, which is set entirely by people trading bitcoin and its value has moved wildly over time.
But this should not be the main reason to adopt cryptocurrencies in developing countries. We have to look at this narrative from a historical perspective of the CFA franc and its structure (also described by the four pillar of the CFA franc).
Historically, the CFA franc – originally the French African Colonial franc – was officially created on 26 December 1945 (72 years!) by a decree of General de Gaulle. It is a colonial currency, born of France’s need to foster economic integration among the colonies under its administration, and thus control their resources, economic structures and political systems. The post-independence the CFA franc was re-designated as follow:
- For the 8 members of the West African Economic and Monetary Union (ECOWAS): Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo – it became the West African Financial Community franc;
- For the 6 members of the Central African Economic and Monetary Community (CEMAC): Cameroon, Central African Republic, Republic of the Congo, Gabon, Equatorial Guinea and Chad – the Central African Financial Cooperation franc.
- Central Bank of the Comoros.
The two zones possess economies of equal size, each representing 11% of GDP in sub-Saharan Africa. The two currencies, however, are not inter-convertible.
Structurally, as established by the monetary accords between African nations and France, the CFA franc has four main pillars:
- A fixed rate of exchange with the euro (and previously the French franc) set at 1 euro = 655.957 CFA francs.
- A French guarantee of the unlimited convertibility of CFA francs into euros.
- A centralization of foreign exchange reserves. Since 2005, the two central banks – the Central Bank of West African States (BCEAO) and the Bank of Central African States (BEAC) – have been required to deposit 50% of their foreign exchange reserves in a special French Treasury ‘operating account’. Immediately following independence, this figure stood at 100% (and from 1973 to 2005, at 65%).
- The principle of free capital transfer within the franc zone.
This arrangement is a quid pro quo for the French ‘guarantee’ of convertibility. The accords stipulate that foreign exchange reserves must exceed money in circulation by a margin of 20%.
Despite its exceptional longevity, the CFA franc by no means enjoys unanimous support among African economists and intellectuals. Its critics base their analysis on three separate arguments.
Firstly, they condemn the absence of monetary sovereignty in those counties that have adopted the currency. France holds a de facto veto on the boards of the two central banks within the CFA franc zone. Since the reform of the BCEAO in 2010, the conduct of monetary policy has been assigned to a monetary policy committee. The French representative is a voting member of this committee, while the president of the ECOWAS attends only in an advisory capacity.
Secondly, given the fixed rate of exchange between the CFA franc and the euro, the monetary and exchange rate policies of the franc zone nations are also dictated by the European Central Bank, whose monetary orthodoxy entails an anti-inflation bias that is detrimental to growth.
Thirdly, critics of the CFA franc focus on the economic impact of the CFA franc, construed as a neo-colonial tool that continues to destroy any prospect of economic development in CFA zone nations. The CFA franc is perceived as a barrier to industrialization and structural transformation, serving neither to stimulate trade integration between user nations, nor boost bank lending to their economies. The credit-to-GDP ratio stands around 25% for the ECOWAS zone, and 13% for the CEMAC zone, but averages 60%+ for sub-Saharan Africa, and 100%+ for South Africa, etc. The CFA franc also encourages massive capital outflows. The membership of the franc zone is synonymous with poverty and under-employment, as evidenced by the fact that 11 of its 15 adherents are classed as Least Developed Countries (LDCs), while the rest (Côte d’Ivoire, Cameroon, Congo, Gabon) have all experienced real-term economic decline.
The President of El Salvador believes that in order to promote the economic growth of the country, it is necessary to authorize the circulation of a digital currency whose value obeys exclusively to free market criteria, in order to increase national wealth for the benefit of the greatest number of inhabitants. El Salvador has used the U.S. dollar as its official currency since 2001, and Bukele believes that adopting bitcoin as legal tender will help reduce its dependence on the decisions of a foreign central bank.
Furthermore, Salvadorans received some $6 billion in remittances last year from relatives living abroad, mostly in the United States. Bukele has said adopting bitcoin could save on the costs of sending that money home.
What holds us back from pursuing the direction that has been boldly taken by the government of El Salvador? What are the main barriers and how can these be overcome? I pose these questions to both economists and historians, my friends and big brothers, Hakim, Achille, Celestin and Leonce.
Over to you!