HomeBusiness DigestLow interest rates hold back savings

Low interest rates hold back savings

Eric Chiriga

INTEREST rates on savings remain subdued, militating against government efforts to boost savings and turn around Zimbabwe’s ailing economy.

The government launched an economic blueprint, the National Economic Development Priority Programme, nearly three months ago. The blueprint, aimed at tackling a six-year economic crisis, is expected to enhance savings and trigger investments inflows in the country.

Savings are estimated to be at around 10% of gross domestic product (GDP). Ideally, savings should be at 60% of GDP.

Low savings have resulted in increased money printing by the government, which cannot raise enough money from domestic borrowings.

Interest rates on savings are pegged at between 3% and 10% per annum, while rates on borrowings are as high as 800% per annum.

Some commercial banks are paying interest on savings of as much as 9% only on amounts exceeding $500 million.

However, fixed deposits are attracting better interests of between 100% and 500% depending on the tenor of investments.

The low interest rates have resulted in people moving their money quickly from cash into assets due to the high inflation rate.

Moreover, a cash crunch evidently troubling the financial sector has also worked as a disincentive to saving.

Sources said while deposits in current and savings accounts constituted the largest chunk of deposits made with local banks, banks were finding it unprofitable to pay high interests on these forms of deposits because of the high statutory reserve requirements on them.

“Interest on savings is not significant,” a bank official told businessdigest.

“Savings accounts are now used to keep money that is used like current accounts and not as a way of saving (investing),” the official said.

Some banks have announced that they shift focus from retail banking, which includes savings and current accounts, to wholesale banking due to poor business in the area.

Because of the country’s galloping inflation, most individuals have developed a tendency of maintaining minimum balances in their savings accounts.

According to statistics from the Reserve Bank of Zimbabwe, the difference between maximum interest rates offered on savings and three-month deposits have continued to grow, especially in the second half of 2005.

In January 2005, maximum interest on savings was 25% per annum compared to 105% on 90-day deposits.

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