Exchange Rate Misalignment and Growth in Exports: Lessons from the 1994 CFA Franc Devaluation

On January 12th 1994, the members of the CFA Franc zone took a bold decision to devalue their currency by 50 %. Despite the significance of this macroeconomic event, the devaluation and its effects on export growth has been given surprisingly little attention. This paper tries to fill this gap in the literature by assessing the impact of the devaluation on export growth, using the synthetic control method (SCM). We find that across the zone, exports as a percentage of GDP were on average 5.03 percentage points higher compared to a synthetic control in the six years following the devaluation. We show that these effects are robust to a series of alternative specifications of the synthetic control method as well as to a set of robustness checks in space and time. However, there is some evidence of heterogeneous impacts within the CFA zone. Considering a different outcome measure, the results for export volumes suggest wide variation in country experience as well as a sluggish response to the devaluation. When exports are measured in dollar terms, rather than volumes, the analysis suggests that there was no significant change after devaluation for most countries but a slight contraction for a few. Our findings suggest exporters are slow to increase export volumes but are quick to raise export prices measured in CFA francs, giving rise to a high exchange-rate pass-through. Further analysis suggests that the change in misalignment of the CFA franc just before and after the devaluation is of a similar magnitude to the misalignment today, suggesting depegging the currency and letting it float freely may possibly yield similar results.