Cato Scholar’s Plan to Save Zimbabwe’s Currency Considered by SADC Leaders

Steve Hanke's proposal to link the Zimbabwean dollar to South African rand "on the table" in Southern Africa.

July 12, 2007

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WASHINGTON — The Southern African Development Community (SADC) is preparing to rescue the Zimbabwean economy by extending the rand’s Common Monetary Area into Zimbabwe, press reports from the region indicate.

The SADC plan closely follows the proposal made by Cato Institute Senior Fellow and Professor of Applied Economics at Johns Hopkins University Steve Hanke, who has advocated the creation of a currency board that would end Zimbabwe’s spiraling inflation.

“[The board] should issue Zimbabwean dollars that would be fully backed by and convertible into rand at a fixed rate. The currency board should be initially capitalized by South Africa. In addition, the rand should be allowed to circulate legally in Zimbabwe,” Hanke, one of the world’s leading currency experts, argued in Forbes magazine on June 4, 2007.

Tomaz Salamao, the SADC’s executive secretary, has reportedly drafted a similar proposal that would top up Zimbabwe’s depleted foreign reserves with South African currency and allow Zimbabwe to join the rand monetary area whose current members include South Africa, Namibia, Lesotho and Swaziland. In exchange for South African support, Mugabe’s government would commit itself to far-reaching political and economic reforms.

Zimbabwean inflation has been estimated at 5,000 percent per annum and the Zimbabwean dollar trades at a rate of Z$250,000 to US$1. Zimbabwe’s economic meltdown, of which inflation is but one symptom, is a direct result of the wrong-headed expropriation of commercial farms that vastly diminished tax revenues and led the Reserve Bank of Zimbabwe to print more money to finance the growing gap in the budget.

According to the South African press, the price of South Africa’s help will be Mugabe’s commitment to economic and political reforms that must include free and fair elections next year.