Resuscitating the culture of savings essential for economic stability
BY ZVIKOMBORERO SIBANDA
The Reserve Bank of Zimbabwe (RBZ) recently issued a new statement directing the Zimbabwe Bankers Association (BAZ) to comply with the requirements of Statutory Instrument 65A of 2020. The SI65A requires banking institutions to pay debts. interest on savings and term deposit accounts.
The banking regulator – RBZ has set a minimum interest of 5% and 1% per year to be paid by banking institutions on all savings accounts denominated in local and foreign currencies, respectively from July 1, 2021. In the same On the other hand, banks should be paying nominal interest of 10% and 2.5% per annum on term deposits denominated in Zimbabwean dollars and United States dollars, respectively. In addition, there will be no bank charges on savings and term deposits.
In finance, a savings account is defined as a personal bank account maintained by individual clients to deposit their personal savings and carry out their personal monetary transactions, while a term deposit account is an account in which a client deposits money. money for a specified term and at a specified interest rate.
The main purpose of maintaining a savings account is to hold money with high liquidity while that of a fixed term deposit is to generate interest, hence a mode of investment for clients.
Economists define “saving” as the process of setting aside a certain proportion of current income for future use. It takes various forms including in particular the increase in bank deposits, the increase in liquidity or the purchase of securities. Savings are essential for economic growth and development because of their relationship to investment.
In order to achieve an increase in productive wealth, a part of the population must be willing to postpone its current consumption.
As such, economic progress does not depend solely on savings; there must also be people ready to invest and increase the productive capacity of the economy.
Here at home, alongside the economic decline that has lasted for decades, national savings are seriously collapsing. The prices of commodities and services have skyrocketed, eroding workers’ incomes. It is essentially difficult to save money in a hyperinflationary environment like Zimbabwe.
World Bank statistics show that national gross domestic savings (GDS) peaked at 22.1% in 1988. The country was then only eight years from the clutches of colonial rule, hence the need for massive investments to improve the well-being of indigenous peoples (in national income accounting, saving always equals investment).
However, from 2004 to date, the aggregate (GDS) has maintained a southerly trend reaching its lowest point of -21.5% in 2008. The country experienced sudden bank closures in the late 1980s. 1990.
Likewise, due to the unsustainable populist policies pursued by the government of former President Robert Mugabe since 2000, the local currency had to depreciate massively – an accumulation of the hyperinflation period of 2008. These events completely wiped out individual monetary savings.
Although a slight improvement in the national savings rate was achieved during the dollarization era instituted in 2009 as prices stabilized and personal incomes improved, the hyperinflation experience of 2008 continued. to harass many citizens. There are significant trust issues to be resolved between the RBZ and the banking community.
The about-face on currency issues over the past decade has eroded confidence levels, which is why the trading public has chosen to keep cash in homes rather than in banks. Customers were not encouraged to keep their money in the bank.
Inconsistent policies have hurt the trading public. In 2014, the bank introduced bond coins, which were followed by bond notes in 2016 as part of the export incentive, as well as to address treasury challenges.
Initially, the surrogate currency was valued at par (US $ 1: ZW $ 1) with the greenback. The government then began to spend beyond its means, resulting in the massive printing of RTGS (fictitious US dollars) balances.
As the situation worsened, the government began rolling out currency reforms by introducing a new currency called RTGS $ in February 2019. In June 2019, SI 142 introduced the Zimbabwe dollar as the new currency. The real value of public bank deposits was again compromised as they were converted using the unrealistic 1: 1 parity.
Fast forward to 2021, the government ‘nicodemically’ released SI 127, forcing companies to compare prices using the RBZ auction rate, which is at least 40% lower than parallel market rates. This amounts to price controls and has negative effects on an estimated 60% informal economy.
Since the government now holds a consistent record of bypassing citizens, it will be difficult for monetary authorities to attract the same audience to put their money in the bank.
Nonetheless, the small steps taken by RBZ to cultivate a culture of savings among the public are a step in the right direction, as they will help mobilize domestic resources.
Zimbabwe does not have the right to access relatively cheap financing from international financial institutions (IFIs) until it has cleared its arrears. Total secured debts are estimated at around US $ 12 billion, most of which is in arrears.
This national debt represents more than 70% of the total national production (which is not sustainable) and given the status quo, the country is fiscally constrained to pay its contributions immediately. Consequently, the government is forced to finance almost all of its programs with domestic resources.
The introduction of interest on savings accounts and term deposit accounts acts as a sweetener for savings. This is likely to see a revival of the culture of savings, which had since died out over a decade ago. But the continued depreciation of the Zimdollar and the resulting high price levels are holding back savings denominated in local currency.
This calls for more sustained government efforts to stabilize the economy, restore confidence in the banking sector, and policy coherence to attract liquidity to the formal banking system.
The economic turmoil of 2019 and 2020, due among other things to Covid-19, plunged millions of people into poverty. In general, the poor have a higher marginal propensity to consume and a lower marginal propensity to save.
In my opinion, for savings to grow in Zimbabwe, inflation must be reduced to less than 10% and the government must be politically coherent to regain public confidence.
This is not the only suggested panacea for economic problems, but certainly something worth considering for government policies to work and ultimately transform the economy.
The ambitious goal of achieving upper middle income status by 2030 requires such strong economic reforms, which translate into improved livelihoods of the population.
Sibanda is an economist at Equity Axis. He can be contacted at [email protected]