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Savings not saving the economy

By Tafara Mtutu

SAVINGS, in the economic sense, refer to the amount of income that remains after autonomous and discretionary consumption.  Autonomous consumption is defined as the expenditure that consumers must make even when they have no disposable income, while discretionary consumption largely refers to non-essential spending.

Various studies have concluded that countries with a good culture of savings tend to experience stronger economic growth and vice versa.

This economic relationship has largely held true, but the unique case of Zimbabwe has questioned this long-standing relationship in the last 20 years.

The level of savings is determined by four main factors, namely (i) interest rates, (ii) wealth, (iii) income distribution, and (iv) consumer credit. Higher interest rates often encourage higher savings because of a better rate of return on funds held in the bank.

Monetary policy-makers often use interest rates as a tool to control economic growth, such as raising interest rates to slow down demand-driven inflationary pressures and vice versa when stimulating economic growth.

In Zimbabwe, interest rates have been out of touch with current levels of inflation, and this has contributed to the country’s poor culture of savings in the formal system.

Zimbabwe’s policy rate ranged between 15% and 70% since 2019, which was incommensurate with the very high Year-on-Year inflation figures over the same period.

Zimbabwe’s YoY inflation moved from 57% in January 2019 to 837% in July 2020 before receding to 50% in August 2021. The disparity between inflation and interest rates deterred savings because of the loss in real dollars that depositors incurred during the period.

According to various studies, people with more wealth tend to save more and vice versa.

Wealth in this context is often proxied by the GDP per capita, or simply a country’s GDP divided by its population.

The trend in Zimbabwe’s GDP per capita has pointed downwards since after it experienced a bumper harvest similar to the most recent agricultural season.

However, consecutive droughts, inflation, and currency depreciation in the years that followed resulted in a GDP per capita of US$1,128 in 2020, which was 22% lower than 2016 levels. Given the improvement in wealth after good agriculture seasons and the high possibility of a consecutive good season in 2021/22, Zimbabwe’s wealth is like to shoot upwards in 2021 and 2022, with positive implications on the levels of savings in the country.

The relationship between income and savings is similar to the relationship between wealth and savings. However, there is more to unpack when it comes to income distribution.

Economic theories on savings note a factor known as the average propensity to save, or the savings ratio, which is the percentage of income that is saved rather than consumed.

This ratio is often used as a leading indicator of economic growth by economists.

This percentage is also used to derive the marginal propensity to save, which is the increase in savings per each additional dollar of income.

The marginal propensity to save is critical in quantifying the magnitude of the increase in savings on economic output, and this is affected by income distribution.

In a more equal society, an increase in aggregate disposal incomes will result in higher economic output compared to an economy with high income inequality.

Further, in an economy with high income inequality, the majority of the population incurs autonomous consumption that is above their level of income and often results in negative savings, or dissavings.

Zimbabwe’s level of income inequality, as measured by the Gini coefficient, breached 50% in 2019 which indicates that the country is currently far from equality and explains why Zimbabwe’s savings ratio has mostly been negative since 2000.

Consumer credit has also been known to increase spending and reduce savings.

However, Zimbabwe has very limited access to credit facilities and the central bank’s measures to curb parallel market-driven speculative borrowing have inadvertently made it difficult for one to access funds on credit with ease.

There are also some factors that are unconventional yet material in the Zimbabwean context, chief among them being (i) confidence in the formal system, and (ii) payments of interest on savings accounts. Zimbabweans lost confidence in the formal system after the parity between the bond notes and the US Dollar fell apart and deposits were converted to ZWL balances at 1:1 between 2018 and 2019.

This was exacerbated by the depreciation of the ZWL, something that continues up to this day. As a result, any funds set apart as savings are hardly being kept in formal banks in favour of “mattress banks”.

This subsequently implies that there are savings in the economy that remain out of the formal system, and this limits the impact of savings on Zimbabwe’s economic output.

However, we note the recent directive by the central bank (SI 65 of 2020) to banking institutions to begin paying interest payments on savings and fixed deposits, which is welcome step to encourage the flow of funds back into the formal system where they can improve the multiplier effect of savings.

  • Mtutu is a research analyst at Morgan & Co. — tafara@morganzim.com. or +263 774 795 854.

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