On January 12, 1994, the CFA franc - the currency of the thirteen African states of the CFA Franc Zone - was devalued 50 percent. The event had been expected for some time, but the magnitude and one-shot nature of the devaluation posed problems for members of the zone's two monetary unions. The authors conclude the following about what has happened: (a) Inflation has been substantially lower than in most developing countries, but the mechanisms of macroeconomic discipline have been inadequate, especially for fiscal discipline. The recent crisis has its roots in failures of fiscal discipline as much as in the constraints on restoring competitiveness because of the fixed parity. (b) The transmission of inflation across states has not been a problem in the past, but could be more of one in the future with the common nominal shock, the temporary loss of the French franc as an anchor, and the rising importance of supranational quasi-fiscal deficit. (c) For macroeconomic coordination, it is appropriate to continue relying on a mixture of rules and discretion and not on the market, at least in the medium term. The 20 percent rule has been inadequate in the past and should be supplemented by annual targets for fiscal performance (including deficit of Gross Domestic Product ceilings, a primary surplus requirement, and no borrowing to finance current spending). (d) Sanction on errant states should be imposed through reduced access to borrowing. Central Bank and at least some foreign borrowing should be conditional on meeting the annually agreed upon targets. (e) The Central Banks'ability to impose these sanctions should be strengthened, possibly by channeling a portion of foreign credit going to the zone through the Central Banks. Technical assistance may also help. (f) Insulation can be affected by ensuring that quasi-fiscal deficits are explicitly financed by country budgets, reversing the recent trend to make them international by having the BCEAO finance part of the national banks'portfolio problems. (g) The current size of the quasi-fiscal deficit (and hence the future earnings position) of the two Central Banks should be assessed early and put on the budgets of the various national governments, with allocation based on the original source of the problem. If necessary, additional measures should be undertaken to secure a strong capital base for the Central Banks. (h) Exit from the zone is best discouraged by securing the zone's credibility. It should also be clear that those that exit because of macroeconomic problems will not have easier access to international sources of finance.
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