Organization and Performance of Cotton Sectors in Africa ... - infoDev

Box 2.1 (Continued)Togo, 39 percent in Mali, 36 percent in Côte d’Ivoire, 22 percent in Senegal, 9percent in Burkina Faso, 3 percent in Benin, and –19 percent in Chad (that is,undervalued). For an extensive discussion of issues surrounding the CFAFovervaluation, see Hinkle and Montiel (1999). In January 1994, the CFAF wasrepegged to the French franc at 100 CFAF/FF and in 1999 it was linked to theeuro at 656 CFAF/€, keeping its former parity with the FF.The 1994 adjustment to the CFAF, which temporarily restored currencyequilibrium in most WCA countries, coupled with the cotton price increasesof the mid-1990s, induced considerable supply response in the cotton sectorsof most WCA countries. For example, regional cotton production increasedfrom 573,000 tons in 1993/94 (the year before devaluation) to 921,000 tons injust four years. For the nine years that followed, however, cotton outputremained, for the most part, stagnant at 900,000 tons. Such stagnation alongwith the financial difficulties of the cotton companies may be a result of, inpart, the likely overvaluation of the CFAF. This result should not be surprising.During 2005/06, the U.S. dollar Cotlook A Index (that is, the world priceof cotton) average was roughly the same as in 2000/01. However, during thesame period, the CFAF appreciated from 731 CFAF/$ to 535 CFAF/$, effectivelyreducing the world price of cotton in CFAF terms by 37 percent.was giving to CFA countries in the 1990s disappeared. Figure 2.3 depicts theConsumer Price Indices adjusted bilateral exchange rate of three countries,India, China, and Burkina Faso, since January 2002. Although India andChina have seen little real depreciation, the CFA franc in Burkina Faso hasappreciated by almost one-third against the U.S. dollar in real terms. Thesefluctuations affect the performance of the cotton sectors: China’s cotton productionincreased from 5.3 million tons in 2003 to 8 million tons in 2007.Similarly, India’s cotton production increased from 3.0 to 5.3 million duringthe same period. Cotton production in WCA, however, declined from 0.91 to0.79 million tons during the period.Exchange rate movements are also an important issue in Zambia, but for adifferent reason (Tschirley and Kabwe 2007b). From 1996 through 2001, theZambian kwacha slowly depreciated in real terms against the U.S. dollar. As aresult, export sectors with a significant share of costs in local currency wouldhave been able to earn slightly higher profits, all else being equal. From mid-2002 to mid-2005, however, the kwacha appreciated more than 30 percentagainst the U.S. dollar. Though this pattern may have been broadly consistentwith depreciation of the U.S. dollar more generally, the kwacha then appreciatedan additional 35 percent over the next nine months, putting extraordinarypressure on its export sectors. A slight recovery in the real rate in late 2006 leftit still well below typical levels from 1996 through 2002.Zimbabwe faces exchange rate issues as well, albeit of a different kind. Since2001, exporting companies have been required to remit a proportion of all18 BAFFES AND ESTUR