Zimbabwe ready for savings?

Terence Zimwara

The hyper inflation of the last decade is best remembered for the demise of the Zim dollar and the disappearance of products from shelves among other things.

However, the one serious consequence of hyperinflation, something which continues to inhibit Zimbabwe’s economic recovery- is the disappearance of savings.

In the first two decades since independence, savings were very much a part of life for most of the working class. Products which ranged from savings fixed deposits accounts to life assurance policies were popular with the general working population.

The uptake of these products by the majority of the working population then was an indicator of a functioning and healthy saving culture.

The hyper inflation that characterized the economy between the years 2000 and 2008 when the local currency finally collapsed played a huge part in destroying savings not to mention the culture saving itself.

In fact the dearth of the savings culture started well before 2008 but it became apparent in 2009 when Zimbabwe adopted the so called multiple currency system.

The use of multiple currencies had one major consequence for the economy, the central bank’s inability to perform the lender of last function coupled with the absence of an interbank lending market. It also meant that the central bank lost one of its critical function, that of creating credit and printing of money.

With no foreign direct investment flowing into the economy as a result of the perceived high country risk, suddenly there was no money available for funding medium to long term credit needs of industry.

In fact since 2009, the majority of deposits that have been mobilized by banks have remained transitory or very short term, resulting in the mismatch between what industry needs and what banks can avail.

On one hand, you have very short term funds available for lending at very high interest rates against the credit needs of industry which are not short term by any measure.

The high country risk means that the few lines of credit that the country has managed to mobilise come at a premium which often results in local firms not utilizing such facilities.

It is in this context that one financial institution, CBZ holdings launched a set of ambitious products which it hoped would allow it mobilize medium to long term deposits.

Speaking at a results briefing recently, CBZ chief executive, Dr John Mangudya told analysts that his group’s ‘CBZ cash plus’ product range had registered some success in mobilizing longer tenure deposits.

According Dr Mangudya, at least $20 million had been raised across the entire product range and this was pleasing to CBZ and plans were afoot to embark on further road shows to promote these products.

CBZ believes that there is potential to raise even more funds a reaffirmation of a belief by some economists that the economy is now ripe for a return to savings mobilisation.

However the question has been how to do that given the reluctance by the public to fully embrace the banking system following years of hyperinflation.

Inflation which was the biggest destabilizing factor to savings has since retreated to record lows, currently below one percent according to figures last released by Zimstats.

For its part CBZ said it was promising a return of between four and eight percent interest for individuals that chose to invest in its fixed term products.

Bank fees and charges which, are sometimes blamed for general reluctance by the population to fully  embrace the banking system, are nil in this case and the net effect is an interest earning above the rate of inflation something quite uncommon before dollarization.

However, a few banks if any seem to have followed CBZ’s lead on this, an approach which could potentially become a turning point in efforts to turnaround the economy.

Many economists and analysts have said up to $3 billion was or is needed to kick start recovery of industry which is in dire need of capital for re tooling and new technologies.

Ironically, a similar figure is thought to be circulating outside the banking system with Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU), an economic think tank conservatively placing the figure at $2.5 billion back in 2011.

Banks will have to find creative ways of attracting that money and one way is offering interest rates that would entice people to keep their money with banks as opposed to the ‘under the pillow’ banking  system that currently prevails.

In absence of foreign direct investment and a central bank not fully functioning, this may be the only realistic chance that the country has to mobilize funds for true economic recovery.

Authorities need to encourage more financial institutions to take this root by even offering incentives to banks that take heed of this.

Of course confidence in banking hit an all time low in 2008 when Zimdollar account balances disappeared and foreign currency accounts were raided by the central bank.

The government has promised to deal with the issue by compensating all claims against the central bank. Expeditiously resolving this matter will go a long way in restoring confidence in the financial services sector a key factor in all attempts to mobilize savings.

Once mobilized, savings act as a pool of funds that local companies can tap into to fund their medium to long term credit needs.

More importantly, medium to long credit raised this way will have significantly lower interest rates compared to internationally sourced lines of credit which must incorporate a country risk premium.

It remains to be seen if other financial institutions will follow up with this approach and if indeed the government comes to the party by honouring its pledges to help restore confidence in the financial system.