Central Africa's francs sag under weight of soaring US interest rates
Paris's former colonies in Africa have quietly watched their French-pegged currency fall by more than 20 percent since the beginning of the year, and 40 percent in the last 18 months. TMitterrand government about the burden that high US interest rates have put on the French economy, little has been said about the way Francophone states have been affected by the high rates. For the most part, these are economies that are problem- ridden in the best of times. But with soaring US rates, West and Central African governmetns have come upon even harder times.
In January 1980, it took 200 Central African francs (cfa) to buy a dollr's worth of goods. A year later, it required 240 cfa, and today the cost is 290 cfa.
But unlike France, with its ample foreign reserves and strong industrial base , the franc countries can do nothing to change that trend. The cfa is tied -- at a fixed rate of 50 cfa to 1 French franc -- to the fortunes of their former ruler's currency.
The results of the drop in purchasing power for the Francophone countries are far-reaching, though largely predictable.
Prices for dollar-denominated imports -- including oil, rice, and automobiles -- have skyrocketed, throwing already hard- pressed trade balances further into the red. Foreign reserves, perilously low in many of the 13 countries, are being drained to pay for essential imports like rice and petroleum, and governments are scampering to buy whenever possible in France because the franc and the cfa are interchangeable. The practice reinforces a dependence many of the countries were struggling to break.
Non-French firms are feeling the pinch, as their products become less competitive. Many are already shifting to French products when they can, cutting profit margins or asking suppliers for a break in price.
Less obvious, but potentially more harmful, is the dilemna posed by the sharp runup in French interest rates to counter the flight of money to the high American rates. Essentially, say Western bankers in the region, the governments here can follow the French-lead, almost certainly fueling inflation and squeezing, perhaps to death, fledgling local industries. Or the governments can continue to hold down interest rates and watch credit dry up as the cfa deposits flee to France for a better return.
Hardest hit of the franc-zone countries are the oil importers, which include all those in the region except Gabon, Cameroun, and Congo. "Obviously, the rise in the dollar is going to have a negative effect on the balance of trade for the oil importers," said a French commercial attache in the region.
Senegal, for example, paid $220 million for petroleum imports in 1980, and the Ivory Coast $450 million. The drop of the cfa agianst the dollar would add about $40 million to the Senegalese bill, and probably double that for the Ivory Coast, provided there is no rise in consumption in the country concerned and no increase in oil prices.
The case of rice is much the same. The favorite food of much of West Africa, it, too, is pariced in dollars. "If the dollar goes up 20 percent the cost of rice goes up the same," said a French banker in Douala, Cameroun. "But the peasant's income isn't going to go up that much."
Increases in the price of rice are extremely unpopular in African cities -- one had a major influence on the 1979 riots in Liberia.
At the same time, successful inroads made by american, Japanese, and other European firms into what was once considered France's backyard are likely to suffer from the dollar's climb.
Though statistics are lacking, firms selling everything from "mu," a chemical needed for oil drilling, to vehicles, report they are having increasing difficulty offsetting the high dollar rate. "I'm very worried," says a representative of C. Itoh, who deals in imported Mazda cars, as well as a variety of other Japanese goods. "Most of our contracts are in dollars, and our customers are already complaining that they can't cover the increases."
"We've had to take a 17 percent cut in profits since February," said one US oil service company manager. the reason: "We buy the bulk of our products in dollars, and sell them in cfa,c he explained. "All the other [US] companies are the same."
French exporters are generally pleased with their widening advantage but French bankers don't share their optimism. "because of the Mitterrand threat of nationalization [in France], French companies aren't investing, so supplies are going to drop,c said a French director of a bank here. "Yes, the rise in the dollar is going to make Africans want to buy more things in France, but [in a couple of months] they're not going to find the goods," he concluded.
A more immediate problem appears to be a worsening credit shortage, due primarily to the large difference between French interest rates and those fixed in most of the African states. Several Western banking sources report that deposits in West and Central Africa are drying up -- many have stopped lending to new customers.
"I'm borrowing in Paris at 22.75 percent and lending here at 13.75 percent [ the fixed rate in Cameroun], said a French banker. "I make myself a note: every time I lend 100 cfa I lose 9." Banks are forced to borrow offshore at much higher rates because deposits are increasingly difficult to attract.
The no-win choive of raising rates or watching economic activity grind to a halt has still to be faced by the West African governments, and Western financial sources are divided on what steps will be taken. They are unanimous, however, that something must be done to attract funds.
If they don't, there'll be a recession," said one regional banker flatly.
Not surprisingly, French bankers in the region blame the US government for the dilemna.