Measuring Financial Repression in CFA Franc Zones: Index Construction and Implications for Investment Activity

This study develops a composite index of financial repression to overcome persistent gaps and inconsistencies in financial data across the CFA franc zones. The index aggregates proxies such as interest rate spreads, real interest rates, domestic credit to the private sector as a percentage of GDP, broad money supply as a percentage of GDP, and bank liquid-reserves-to-assets ratio, with inversion applied to align higher values with greater repression. Fixed-effects panel regressions reveal a significant negative impact of repression on gross capital formation, indicating a 2.8 percentage point reduction per unit increase, robust to controls including GDP per capita growth, trade openness, population growth, public debt, and inflation. Findings underscore repression’s role in impeding investment activity in CFA franc zones, where centralized controls crowd out private allocation amid fiscal dependencies. Policy implications advocate for gradual liberalization to enhance intermediation, while future research could extend to dynamic interdependencies via vector autoregression. This contribution advances repression measurement in African contexts, bridging theoretical distortions with empirical evidence for sustainable growth.