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Conflicts and Geopolitics Reshape the World’s Currencies

Categories : Cash and Crises, Cash is a symbol of national sovereignty
April 16, 2024
Tags : Argentina, CFA Franc, Currency exchange, Kosovo, Zimbabwe
Regional conflicts, ramping inflation, national debt crises, and the resurgence of monetary sovereignty all contribute to reshaping the world’s currencies.
Guillaume Lepecq

Chair, CashEssentials

This post is also available in: Spanish

CFA Franc Could Lose Half its Members

The President of Senegal, elected in February 2020, has announced plans to withdraw from the CFA franc.

The CFA franc is the name of not one but two currencies: the West African CFA franc (XOF) used by Benin, Burkina Faso, Guinea Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo, and the Central African CFA (XAF) used by Cameroon, Chad, Central African Republic, Congo Republic, Equatorial Guinea and Gabon. Both currencies are pegged to the euro with an exchange rate of XOF/XAF 655 = € 1. France guarantees the peg, counterpart members are required to hold half of their foreign reserves with the Banque de France, and a French official sits on the board of both central banks. In 2019, both conditions were dropped for the West African Monetary Union, and a name change from CFA to Eco was announced. However, no progress has been made about the new name.

In September 2023, Burkina Faso, Mali and Niger founded the Alliance of Sahel States and announced their withdrawal from the Economic Community of Western African States (ECOWAS) after military juntas overthrew the governments of the three states. The three countries have indicated their intention to drop the CFA franc, but no clear plans have been made since then.

The CFA has been increasingly criticised in Africa by public opinion and economists. It is viewed by many as a relic of colonialism. Initially, the CFA franc stood for Franc of the French Colonies of Africa, though it was recently changed to Franc of the Financial Community of Africa. And the foreign reserves of the participating countries stored in the vaults of the Banque de France were a potent symbol of post-colonialism. Some economists argued that the peg to the euro removed monetary and fiscal independence and had failed to boost regional trade. The inability to devalue the currency has prevented economic development by maintaining an artificially high exchange rate. Proponents of the CFA franc believed that it had ensured economic stability and controlled inflation.

Argentina Province to Launch Quasi-Currency

Javier Milei was elected president of Argentina in December 2023 with a plan to dollarise the economy and eliminate the peso and the central bank. At first glance, it may seem paradoxical for an ultra-populist to abolish the national currency, which is supposed to be one of the most potent attributes of sovereignty.

Three other Latin American countries have officially adopted the U.S. dollar as legal tender. Panama was the first to embrace the dollar in 1904 to fund the construction and operation of the Panama Canal. However, Panama also kept its local currency, the balboa. This balboa is pegged to the dollar 1:1. In 2000, Ecuador replaced its sucre with the dollar in response to a severe economic crisis that saw inflation rise to 95.5 per cent. El Salvador transitioned to the dollar in 2001. In June 2021, El Salvador became the first country worldwide to make Bitcoin legal tender.

Plans to drop the Argentinian peso were scrapped shortly after Milei’s election. Instead, the peso was devalued by over 50% in December.

In January, the province of La Rioja approved the issuance of a quasi-monetary unit to pay the public workers’ salaries as budgetary restrictions from the federal government began to be felt. Governor Ricardo Quintela submitted the bill to create the Bond de Cancelación de Deuda (BOCADE), the Debt Cancelation Bond, which will be known among users as “Chacho” after slain caudillo Ángel Vicente Peñaloza, one of the last caudillos to revolt against the centralism of Buenos Aires.

“It is a debt cancellation bond, which is going to be debated today, possibly sanctioned on the day of the date, and which authorises the issuance of a series of salary cancellation bonds”, Quintela explained upon sending the bill.

The province will start by issuing AR$15 billion worth of chachos (some US$18 million at the official exchange rate). It remains to be determined whether actual chachos will be printed or if they will only consist of digital entries into the workers’ bank accounts. Chachos will be legal tender within the province.

Zimbabwe Launches Gold-Backed Currency

The Reserve Bank of Zimbabwe has launched a new gold-backed currency called ZiG to help stabilise the economy and protect citizens from currency fluctuations and sky-high inflations. ZiG,  which stands for “Zimbabwe Gold”, is anchored to a composite basket of foreign currency and precious metals (mainly gold) held as reserves by the Reserve Bank for this purpose.

According to Reserve Bank Governor John Mushayavanh, the bank aims to replace the Zimbabwean dollar, the Zim dollar or Real Time Gross Settlement (RTGS) dollar. The Zimdollar was introduced in February 2019 and was the only legally permitted currency for trade in Zimbabwe from June 2019 to March 2020, after which foreign currencies were legalised again following the sharp depreciation of the Zimdollar. He added that Zimbabweans have 21 days to convert their old cash into new money. During this time, the US dollar, which accounts for 85% of transactions, will remain legal tender.

Banknotes will come in denominations of 1, 2, 5, 10, 50, 100, and 200 ZiG, and coins backed by Zimbabwe’s gold reserves will also be introduced to overcome the shortage of US coins, which has led to consumers often receiving change in the form of sweets, tiny chocolates, and pens.

Kosovo Banning the Serbian Dinar

On 1 February 2024, the central bank of Kosovo banned transactions in Serbian dinar, widely used to pay pensions and salaries to staff in Serbian-run institutions, including schools and hospitals. The ban bars banks and other financial institutions in ethnic Serbian-dominated areas, especially in the north of Kosovo, from using the dinar in local transactions and requires them to use the euro, Kosovo’s official currency.

U.S. Deputy Assistant Secretary of State Gabriel Escobar said he was “very concerned” that Kosovo’s decision to ban the use of Serbian dinar in the north could cause “an emerging humanitarian issue” for the ethnic Serb minority.

“These steps are concerning because they are not contributing to de-escalating the situation,” said Josep Borell, the EU’s high representative for foreign affairs. “They are not coordinated; they are unilaterally taken without the necessary level of prior consultation to pre-empt or prevent the negative impact they might have on the ground.”

This post is also available in: Spanish