Uwem Essia
This study utilizes the Synthetic Control Method (SCM) to explore potential economic pathways for Cameroon in the event of a transition from the CFA Franc. Using SCM, we constructed a synthetic model of Cameroon by combining data from five control countries—Nigeria, Namibia, Botswana, Morocco, and Libya—each chosen for their unique currency regimes that could be relevant to Cameroon’s post-CFA arrangement. This comparative approach allowed us to examine the potential impacts on key economic indicators, including GDP growth, inflation, trade balance, and foreign direct investment (FDI) inflows. Through this process, we assessed the benefits and trade-offs of different currency regimes, offering empirical insights into the economic implications for Cameroon under various currency scenarios.
Our findings highlight that a currency basket arrangement, a system where a country’s currency is pegged to a weighted average of several foreign currencies, would likely provide the most balanced economic performance for Cameroon. This model, exemplified by Botswana’s approach, minimizes economic vulnerabilities while offering flexibility. Conversely, a reformed Euro peg was identified as a stable but less adaptable alternative. The study argues that rather than an abrupt transition to currency sovereignty, Cameroon would benefit from a phased reform of the CFA Franc system, potentially integrating a currency basket as a key component of its new monetary framework. This approach would not only enhance economic stability but also gradually expand Cameroon’s monetary policy autonomy.
Background on the CFA Franc: A Double-Edged Sword for Economic Stability
The CFA Franc is a currency shared by 14 West and Central African countries, including Cameroon. Historically, this currency has contributed to regional monetary stability and helped maintain low inflation rates. However, it has also faced criticism for limiting the monetary policy autonomy of its member states, as the CFA Franc is pegged to the Euro and subject to the European Central Bank’s policy decisions. This dependency on external monetary policy has constrained the economic flexibility of member states, leaving them unable to independently address domestic economic challenges. Furthermore, there is widespread agreement among economists that the CFA Franc is overvalued, which has hindered export diversification and discouraged import substitution.
Given Cameroon’s economic profile as the largest economy within the Central African Economic and Monetary Community (CEMAC), the issue of currency reform is especially pertinent. Cameroon’s reliance on the CFA Franc, coupled with its dependence on oil and primary exports, has limited its ability to respond effectively to economic shocks and external pressures. Consequently, this study seeks to evaluate whether transitioning from the CFA Franc to a more autonomous currency regime would offer better prospects for economic resilience and growth.
Objectives and Scope of the Study
The primary objective of this research is to evaluate Cameroon’s potential economic trajectories under different currency regime scenarios. This involves forecasting the key economic indicators for Cameroon, particularly GDP growth, inflation rates, trade balances, and FDI inflows, for the period between 2026 and 2030. Using SCM, the study compares Cameroon’s performance under various post-CFA Franc scenarios and ranks them based on their potential impact on these economic indicators.
Specific objectives include:
- Forecasting Cameroon’s economic indicators from 2026-2030.
- Using SCM to analyze economic indicators before and after the hypothetical currency transition.
- Assessing the economic outcomes under different currency regimes.
- Benchmarking Cameroon’s economic performance against similar economies with alternative currency frameworks.
- Ranking currency scenarios based on their projected economic impact and providing policy recommendations.
Methodology: The Synthetic Control Method in Currency Transition Analysis
The Synthetic Control Method is an advanced quantitative technique well-suited to assess the economic impact of large-scale policy interventions. For this study, SCM was applied to create a synthetic model of Cameroon by combining data from five control countries, each representing a different currency arrangement. These control countries provide counterfactuals to evaluate Cameroon’s economic performance under various hypothetical post-CFA currency scenarios.
The analysis focused on four key economic indicators: GDP growth rate, inflation rate, trade balance, and net FDI inflows. Data from 2010-2022 was used as a historical baseline, while projections for 2026-2030 were generated to assess the economic impact of each currency scenario.
The scenarios considered include:
- A floating exchange rate model, as observed in Nigeria.
- A currency peg to either the USD or Euro, based on the frameworks used in Libya and Morocco.
- A peg to a stronger African currency, such as the South African Rand, represented by Namibia’s model.
- A currency basket approach, inspired by Botswana’s model, would diversify currency exposure and reduce reliance on a single foreign currency.
Key Findings: Economic Indicators and Scenario Rankings
The analysis revealed significant disparities between Cameroon’s historical economic data and projections under each post-CFA scenario:
- GDP Growth: The projected growth rate under the synthetic currency basket was positive and stable, while the floating currency model indicated more volatility.
- Inflation: The basket peg scenario offered the lowest projected inflation, contrasting with higher inflation rates under a floating exchange rate.
- Trade Balance: A more balanced trade performance was achieved under the basket peg scenario compared to the trade deficits observed in other models.
- FDI Inflows: Moderate and stable FDI inflows were projected under the currency basket arrangement, indicating a favorable investment climate.
Ultimately, the currency basket peg emerged as the most balanced option for Cameroon, combining economic stability with flexibility. The reformed CFA arrangement with a Euro peg was ranked second, offering stability but less adaptability to economic shocks.
Statistical Significance and Hypothesis Testing
Statistical tests were conducted to confirm the significance of the observed differences in economic outcomes across scenarios. These tests support the hypotheses that different currency regimes would have distinct impacts on Cameroon’s economic performance, validating the model’s projections and the selection of the currency basket peg as the optimal approach.
Discussion and Policy Implications
Our findings underscore the risks associated with an immediate shift to currency sovereignty for Cameroon. A sudden transition may lead to economic instability, which could outweigh the potential benefits of monetary independence. Instead, we recommend a gradual approach, focusing on reforming the CFA Franc arrangement to incorporate a currency basket. This approach, we believe, would provide Cameroon with greater flexibility without sacrificing economic stability, reassuring the relevant policymakers about the country’s economic future.
The following policy recommendations are suggested:
- Sustaining Monetary Stability: To ensure economic resilience, Cameroon should adopt a currency regime that prioritizes stability while allowing incremental increases in monetary policy autonomy.
- Diversifying the Economy: By focusing on economic diversification, Cameroon can mitigate the risks associated with external shocks, especially commodity price fluctuations.
- Strengthening Regional Integration: Emphasis should be placed on building stronger economic ties within the CEMAC region, thereby reducing dependency on external markets.
Developing robust financial markets and institutions will be essential to support a reformed currency framework and attract foreign investment. This, we believe, will not only enhance the attractiveness of Cameroon’s economy to foreign investors but also contribute to the country’s economic growth and stability.
Conclusion
This study provides evidence-based recommendations for Cameroon’s monetary reform strategy, emphasizing a phased approach rather than immediate currency independence. Findings suggest that adopting a reformed CFA framework that incorporates a currency basket arrangement would best meet Cameroon’s needs for stability and gradual autonomy. This strategy would provide a solid foundation for long-term economic growth and resilience, preparing Cameroon for eventual monetary sovereignty as its economic structure matures.
This research is part of the Nkafu Policy Institute’s reflections on strengthening the effectiveness of monetary policy in Francophone Africa, thanks to the financial support of the Templeton World Charity Foundation (TWCF). Grant ID#: TWCF- 2022-30501
Get the full research from: https://www.amazon.com/author/uwemessia
