CFA franc (XOF and XAF)

The CFA franc is the shared name of two separate currencies, that of WAEMU (West African Economic and Monetary Union) and that of CEMAC (Economic and Monetary Community of Central Africa), pegged to the euro and backed by a French Treasury convertibility guarantee. Since January 1, 1999, one euro has been worth 655.957 CFA francs, the exact conversion of the old parity of one hundred CFA francs per French franc. The figure has not moved since. The CFA franc actually refers to two currencies: the franc of the Communauté financière africaine (XOF), issued by the BCEAO (Central Bank of West African States) for the eight WAEMU states, and the franc of the Coopération financière en Afrique centrale (XAF), issued by the BEAC (Bank of Central African States) for the six CEMAC states. They have the same value, but a Dakar banknote is not legal tender in Douala, and moving from one to the other requires a foreign exchange transaction. The system rests on a fixed parity, free transferability within each zone and an unlimited convertibility guarantee granted by the French Treasury, with the operations account as its counterpart (the BCEAO's account was closed in April 2021, while the guarantee remains). For underwriting, the consequence is clear. Inconvertibility risk in the sense of a CPRI (credit and political risk insurance) policy, the legal impossibility of exchanging local currency for hard currency, is structurally reduced as long as the guarantee holds. Transfer risk does not disappear for all that: it takes the form of execution delays in the CEMAC zone, where the exchange regulations check every outflow, or of a targeted political measure, such as the freeze on Malian assets in 2022. Devaluation risk has stayed on people's minds since January 1994, and it is excluded from ordinary inconvertibility covers: a CPRI policy covers the inability to convert, never the loss of value. Underwriters also track redenomination risk, since the eco project could change the name and perhaps the regime of the West African currency. A contract denominated in CFA francs is therefore not a contract in euros, even at a fixed parity.