What it means
The eight countries that use XOF are Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal and Togo. They share one currency and one central bank, the Central Bank of West African States, known by its French initials BCEAO.
A separate currency with a similar name, the Central African CFA franc (XAF), is used by six countries in Central Africa and is not interchangeable with XOF. The distinctive feature is the fixed peg to the euro.
One euro is worth 655.957 XOF, and that rate has stayed the same since the euro replaced the French franc as the anchor. This means the exchange rate between XOF and any other currency moves only when the euro itself moves against that currency.
For a business, the peg removes exchange rate risk between XOF and the euro, which is helpful for companies trading with Europe. The same peg exposes XOF holders to the euro's swings against the dollar, so a firm that earns dollars but pays costs in XOF still carries currency risk.
Treasurers should therefore decide whether to hedge the dollar and euro leg rather than assume the peg removes all risk. Supporters of the arrangement point to low inflation and predictable prices, which make planning easier for investors and importers.
Critics argue that a fixed rate limits the ability of local authorities to adjust monetary policy to local conditions, and that it can make exports more expensive when the euro is strong. Views on its future differ, so reports should be read with attention to when they were written.
Practical issues also arise at the transaction level. Moving money between XOF and other currencies usually goes through banks that quote their own spreads, so the real cost of a conversion is the bank's margin on top of the market rate.
Capital controls and reporting rules apply in some cases, so large transfers should be checked with a local bank or adviser. XOF has no decimal subunit in everyday use, so prices and invoices are normally quoted in whole francs.
Large amounts therefore have many digits, which makes mistakes easy. Always confirm the currency code on an invoice, since XOF and XAF look alike but are different currencies.
In practice
Real-world examples.
Example
A cocoa exporter in Ivory Coast sells beans to a European chocolate maker and invoices in euros. Because XOF is pegged to the euro, the exporter can convert the proceeds into local francs at a known rate, which makes budgeting for farmer payments much easier.
Example
A US software company pays 20 contractors in Senegal. Its finance team budgets in dollars but pays in XOF, so a weaker euro makes the contractors cost less in dollars while a stronger euro makes them cost more.
Example
A telecommunications operator with customers across several XOF countries collects revenue in a single currency. It can consolidate results without worrying about separate local exchange rates, although it still faces conversion costs when sending profits abroad.
Formula
Calculation
Amount in euros = amount in XOF / 655.957
Amount in dollars = amount in euros x EUR/USD exchange rate
Suppose a European buyer owes a West African supplier XOF 6,559,570. Amount in euros = 6,559,570 / 655.957 = EUR 10,000, because 655.957 x 10,000 = 6,559,570. For illustration, assume 1 euro is worth $1.10, which is not a forecast. Amount in dollars = 10,000 x 1.10 = $11,000.Case study
Seen in the real world.
Sahel Grain Traders is an illustrative, fictional company that imports rice into three XOF countries and sells in local francs. It buys from Asian suppliers in dollars, which exposes it to the euro-dollar rate, because its selling prices are effectively tied to the euro.
In a year when the dollar strengthened against the euro by about 8%, the company's rice cost rose by 8% in XOF terms while selling prices were slow to move. On annual purchases of $5,000,000, the extra cost was roughly 5,000,000 x 0.08 = $400,000.
The finance director then began hedging part of the dollar purchases with forward contracts, and reviewed pricing every quarter. The illustrative lesson is that a peg to the euro protects against euro risk but does nothing about dollar risk, so importers still need a hedging policy.
Watch out
Common mistakes.
- Assuming XOF and XAF are the same currency, when they are issued by different central banks and cannot be swapped freely.
- Thinking the peg removes all exchange rate risk, when it only fixes the rate against the euro.
- Using a quoted market rate for a large conversion and forgetting the bank's margin, which can add noticeably to the real cost.
Questions
People also ask.
Which countries use the West African CFA franc?
Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal and Togo.
What is the fixed rate against the euro?
One euro equals 655.957 XOF, and the same rate applies to the Central African CFA franc.
Why does the dollar rate for XOF keep changing?
Because the franc is tied to the euro, its dollar value moves whenever the euro moves against the dollar.
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