What Is the West African CFA Franc (XOF)?
The West African CFA franc (XOF) is the shared currency of eight independent states in West Africa. The XOF uses both coins and banknotes, with the franc subdivided into 100 centimes. The Central Bank of West African States, located in Dakar, Senegal, regulates the currency. The members that use the West African CFA Franc consist of the West African Economic and Monetary Union and include Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal, and Togo. Together, these countries have a spending power that exceeds over 78 billion dollars. CFA stands for Communatué financière d’Afrique or African Financial Community.
Understanding the West African 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. The French government or the monetary unions using the currencies could decide to change the value of one or the other in theory.
Because the members are joined together by their use of the CFA franc, they have created what is known as the CFA franc zone. The CFA franc zone is made up of the two independent unions of the West African Economic and Monetary Union and the Central Africa Economic and Monetary Community. The dual union helped cement the value and usability of the CFA franc, first by setting its equivalent to the French franc, which later became the euro. By aligning the values, the colonies were able to gain security and stability with the franc. In return, however, the French treasury required large deposits of their external reserves into their accounts, first at 65 percent and later lowered to 50 percent.
Key Takeaways
- The West African CFA Franc (XOF) is the currency shared by eight West-African nations: Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal, and Togo.
- XOF was once pegged to the French franc, and when France switched to the euro, the currencies retained parity, where 100 CFA franc = 0.152449 euro.
- The West African CFA franc should not be confused with the Central African CFA franc (XAF), shared by Central African nations.
History of the West African CFA Franc (XOF)
Along with the Central African CFA franc (XAF), the West African CFA franc (XOF) makes up the currency for most of central and west Africa. The currency was introduced following World War II and replaced the French West African franc.
Several countries belonging to the West African Economic and Monetary Union (UEMOA) were French colonies using the French West African franc, including the Ivory Coast, Dahomey, French Sudan, Mauritania, Niger, Senegal, Togo, and Upper Volta. As those colonies gained independence, they continued to use the CFA franc for their currency.
Mali, also known as French Sudan, was the only independent colony to create a national currency in 1961. However, by 1984, Mali returned to using the CFA franc, with an exchange rate of 1 CFA franc to 2 Malian francs. The CFA is pegged to the euro.
The creation of the CFA franc was in 1945, following the end of World War II. 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.
Related Terms: Buying Power, Euro, Exchange Rate, Franc, Bretton Woods Agreement, Foreign Exchange Reserves.
