December currency review

Eight countries in west Africa will launch a new common currency in 2020, to be called the eco. It will be much less ambitious than a previous proposal agreed to only a few months ago, with fewer countries involved (at least initially), and despite the obvious attempt to play it safe, big risks remain.

The launch date for the eco has not yet been confirmed, but other details were revealed in a 21 December press conference given by the presidents of Cote d'Ivoire and France. Basically, the eight nations currently using the West African CFA franc (Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo) will adopt the eco in 2020. Like the CFA franc, the eco will be pegged to the euro, with the peg guaranteed by the French government. Expectations are that the six countries currently using the Central African CFA franc (Cameroon, Central African Republic, Chad, Congo Republic, Equatorial Guinea and Gabon) will soon join the eco too and the CFA franc will become defunct.

The more ambitious proposal agreed to by 15 ECOWAS countries, including Nigeria, in July 2019 would have given the eco a more flexible exchange rate, while the inclusion of Nigeria would have ensured a much bigger collective economy, which might have increased confidence in the project. However, many of the smaller countries involved were fearful of Nigeria dominating the union and it appears now to have been quietly dropped from the project.

With the eco to be backed by France and pegged to the euro, you might be forgiven for thinking that nothing was going to change. However, the CFA franc has long been criticised as a French colonial project to prolong Paris' influence in Africa, so a couple of major concessions are included in the new regime that will involve France taking a step back: member states will no longer have to deposit half their foreign exchange reserves with the French central bank; and France will no longer have its own representative sitting on the currency board of the eco.

Therein lie the risks, though. Unless markets retain full confidence in the eco, investors could speculatively attack it, daring Paris to burn through currency reserves to meet its promise of "unlimited" support. France would be doing this without financial backing from eco member states and without a say in their economic policies. It might well baulk if the attack becomes too costly.

Furthermore, the peg to the euro means member countries will have to follow the monetary policy of the European Central Bank, thereby gaining little in sovereignty terms. Old complaints could swiftly reappear. The ECB strives to keep inflation in the Eurozone lower than might be appropriate for these African nations, although there is no doubt this has helped provide stability during the CFA decades.

So far, so good, however. Ghana, also a big economy in the region, has already announced its determination to join the eco, although it would prefer a flexible exchange rate. This is a big confidence boost for the project and, as always with currencies, confidence is everything.

It seems hard to believe that a virtually worthless currency could so often top our monthly table of biggest exchange rate losses, but yet again the Venezuelan bolivar has taken pole position. The country's long-drawn-out economic collapse and political stalemate has somehow worsened once more.

At the more positive end of the exchange-rate spectrum, the Chilean peso was the world's strongest currency in December, bouncing back after months of losses stemming from social unrest and economic paralysis, and boosted by sharply rising prices for copper - Chile's main export.

Finally, here is this month's selected currency movements table: