BY ZVIKOMBORERO SIBANDA
THE Reserve Bank of Zimbabwe (RBZ) recently made new pronouncement directing the Bankers Association of Zimbabwe (BAZ) to comply with the dictates of Statutory Instrument 65A of 2020. The SI65A forces banking institutions to pay interest on savings and fixed deposits accounts.
The banks’ regulator — RBZ set a minimum interest of 5% and 1% per annum to be paid by banking institutions on all local and foreign currency denominated savings accounts, respectively starting on July 1, 2021. In the same vein, banks shall be paying nominal interest of 10% percent and 2,5% per year on Zimbabwean dollar and United States dollar-denominated fixed term deposits, respectively. Further, there will be no bank charges on both savings and fixed term deposits.
In finance, a savings account is defined as a personal bank account maintained by individual customers to deposit their personal savings and undertake their personal monetary transactions whilst a fixed deposit account is an account in which a customer deposits money for a specified fixed tenure and at a specified interest rate.
The primary purpose of maintaining a savings account is safekeeping of money with high liquidity while that for a fixed term deposit is to earn interest, thus a mode of investment for customers.
Economists define “saving” as a process of setting aside a certain proportion of current income for future use. It takes various forms including inter alia increases in bank deposits, increased cash holdings or purchases of securities. Savings are critical for economic growth and development because of its relation to investment.
In order to realise an uptick in productive wealth, a portion of the population must be willing to postpone their current consumption.
As such, economic progress is not dependent on saving only; there must also be people willing to invest and expand productive capacity of the economy.
Here at home, in line with decades-long economic decay, national savings are severely plummeting. Prices of basic commodities and services have been skyrocketing, thereby eroding the workers’ earnings. It is essentially difficult to make savings in a hyperinflationary environment such as Zimbabwe.
World Bank statistics show that national gross domestic savings (GDS) reached their peak of 22,1% in 1988. Then, the country was just eight years from the jaws of colonial rule, hence the need for massive investment to improve the well-being of the indigenous people (in national income accounting, saving is always equal to investment).
However, from 2004 to date, the aggregate (GDS) has maintained a southward trend reaching its lowest point of -21,5% in 2008. The country experienced sudden bank closures in the late 1990s.
Likewise, due to unsustainable populist policies undertaken by the late former President Robert Mugabe’s government since 2000, the local currency had to massively depreciate — a build-up to the 2008 hyperinflation period. These events completely wiped out individual monetary savings.
Though a slight improvement in the rate of national saving was realised during the dollarisation era instituted in 2009 as prices were stabilised and personal incomes improved, the 2008 hyperinflation experience continued hounding many citizens. There are significant trust issues to be addressed between RBZ and the banking population.
The flip-flopping on currency issues in the past decade has eroded confidence levels, hence the transacting public chose to keep cash in homes than banks. There has not been any incentive for customers to keep their money at the bank.
Inconsistent policies have been hurting the transacting public. In 2014, the bank introduced bond coins, which were followed by bond notes in 2016 under the export incentive, as well as addressing cash challenges.
Initially, the surrogate currency was valued at par (US$1:ZW$1) with the greenback. The government then started spending beyond its means, leading to massive printing of RTGS balances (fictitious US dollars).
As the situation worsened, the government began to roll-out currency reforms by introducing a new currency termed RTGS$ in February 2019. In June 2019, SI 142 introduced the Zimbabwean dollar as a new currency. The real value of the public’s bank deposits was compromised again as they were converted using the unrealistic 1:1 parity.
Fast forward to 2021, the government “nicodemously” gazetted SI 127, forcing businesses to benchmark prices using the RBZ auction rate, which is at least 40% lower than the parallel market rates. This is tantamount to price controls and poses adverse effects to an economy estimated to be 60% informalised.
Since the government now holds a consistent record of shortchanging the citizens, it is going to be a tough call for monetary authorities to lure the same public to bank their money.
Nevertheless, the baby steps being taken by RBZ to cultivate a saving culture among the public is a step in the right direction, as it will help in the mobilisation of domestic resources.
Zimbabwe is barred from accessing relatively cheap finance from international financial institutions (IFIs) until it clears its arrears. Total guaranteed debts are estimated to be circa US$12 billion — the bulk are arrears.
This national debt is over 70% of total national output (which is unsustainable) and given the status quo, the country is fiscally constrained to clear its dues in the immediate term. Consequently, the government is forced to finance almost all of its programmes using domestic resources.
Introducing interest on both savings and fixed deposits accounts act as sweeteners for saving. This is likely to see a re-birth of the savings culture, which had since died over a decade ago. But the continued Zimdollar depreciation and the subsequent high price levels subdue local currency denominated savings.
This calls for more sustainable efforts by the government to stabilise the economy, restore confidence in the banking sector and policy consistency to attract cash into the formal banking system.
The 2019 and 2020 economic turbulence, due to Covid-19, among other reasons, has plunged millions into poverty. Generally, poor people have a higher marginal propensity to consume and a lower marginal propensity to save.
In my view, for savings to increase in Zimbabwe, inflation should be reduced to below 10% and government should exercise policy consistency to earn back the public confidence and trust.
This is not the only suggested panacea to economic problems but certainly something worth considering for the government policies to work and ultimately transform the economy.
The ambitious aim of achieving an upper middle income status by 2030 requires such robust economic reforms, which translate into the improvement of livelihoods of the people.
Sibanda is an economist at Equity Axis. He can be reached at firstname.lastname@example.org