Impact of CFA Franc Exchange Rate on CEMAC Nations Economic Growth

The impact of changes in the real exchange rate (RER) on economic growth has been of growing attention in recent policy debates. One of the focal reasons for the growing attention is due to the growth experienced by some East-Asian nations between the period 1965 to 1990s, which is attributed to the exchange rate. On the other hand, the debate was renewed due to series of economic crises faced by some nations, whereby unsustainable exchange rate was identified as the cause.

The main goal of this thesis is to examine the relationship between the CFA franc and the economic growth of the CEMAC zone. This was done by first investigating the state of the currency in all CEMAC nations, as seen in the first empirical question. Because there is not ‘one’ equilibrium REER, rather there is a path of equilibrium REER through time, I used the Behavioural Equilibrium Exchange Rate (BEER) approach by Clark and MacDonald (1998) to ascertain the state of the CFA franc. The results showed that as of the year 2018, the CFA was at equilibrium in all the CEMAC nations, and governments should not be worried.

The second question analysed if currency devaluation improved the trade balance in CEMAC nations through the presence of the J-curve. I used the aggregate bilateral trade date approach by Rose and Yellen (1989), and the aggregate trade date approach by Magee (1973) to analyse the presence of J-curve between the individual CEMAC nations and their main trade partners. Due to lack of data for some of the CEMAC nations, only three CEMAC nations were used in this section (Cameroon, Central Africa Republic – CAR, and Gabon). The results showed the presence of J-curve only in Cameroon models for both approaches, implying that CFA franc devaluation improves the trade balance in Cameroon. The absence of J-curve in CAR and Gabon means that policymakers could use other tools than the CFA franc devaluation to improve their trade balance. Also, there is a need for an improvement of bilateral trade flow within the region.

The third question examined the relationship between the REER and economic growth in the CEMAC zone. The CFA franc devaluation was meant to improve the economic growth of the entire CEMAC Zone. As such, I used the Pooled Mean Group (PMG) panel autoregression distributed lag (ARDL) approach to investigate the nature of the relationship between REER and the CEMAC region’s economic growth. The result showed that the CFA franc devaluation did not influence the region’s economic growth. Thus, policymakers should use other tools to improve the region’s economic growth.