Rebuilding the local savings base is key
INTHE new-normal circumstances that the country finds itself in, where foreign capital has become unreliable, it is prudent, advisable even, for the country to start exploring measures to rebuild its savings base.
Going forward, domestic savings will help set the foundation for future economic growth.
There exists strong empirical evidence that links the country’s economic growth episodes with solid national savings.
Regrettably, local savings continue to dwindle as confidence in the financial services sector has bottomed out following years of financial crises that almost brought it to its knees.
The increasing informalisation of the economy has also not helped the situation as the money circulating in the informal economy is difficult to translate into national savings.
Worryingly, there seems to be precious little action to rebuild the country’s savings base despite all the evidence in support of the urgency of prioritising this imperative.
Simply put, savings represent the amount of money that is put aside for future use.
Zimbabwe is currently dis-saving as it remains a consumptive economy.
The current dis-saving rate of 11 percent largely reflects the huge propensity to consume by households, the private and public sectors.
Consumptive tendencies have turned most economic participants into serial borrowers.
The high level of debt in all sectors of the economy is telling. As at October 30, 2016, Zimbabwe’s public debt stood at $11,2 billion, which represents about 79 percent of GDP (gross domestic product).
Of major concern is the significant proportion of debt in arrears.
The need to service this debt, together with funding budget deficits, will remain a major challenge in Zimbabwe due to revenue constraints.
Government projects a budget deficit of US$400 million in 2017 after an estimated funding gap of $1,8 billion was realised last year.
Clearly, these deficits amount to dissaving as Government always resorts to the domestic market for funding.
And with more than US$1,4 billion treasury bills outstanding and Government’s ever-growing appetite to issue the same, the trend is likely to continue.
Equally, as pension and insurance funds continue to dry up and businesses make dividend payouts, dissavings can only continue.
Historically, Government used to rely on both pension and insurance funds for cheap and stable funds meant for long-term projects.
However, the high unemployment rate coupled with the low confidence in the financial services sector is working against the build-up of investible resources.
Also, harnessing savings from the informal sector has proved to be a very difficult task, especially due to the crisis of confidence that followed successive crises in the financial services sector after 2004.
Muted profits by private sector companies and dividend payments – which make it difficult to reinvest into the business – are some of the factors that make savings almost impossible. The high preference for debt as opposed to equity funding, largely reflects the influence of the existing investor-unfriendly environment. Pension funds and insurance companies cannot however escape the blame for the current challenges in building the country’s statutory and discretionary savings.
Following losses suffered during the country’s hyper-inflationary era, the transacting public is now wary about how their hard-earned savings are used.
Confidence can only be restored after depositors and investors get sufficient guarantees that their money will be protected against future losses. Regrettably, this has not happened yet. The growing dissatisfaction towards the administration of pension and insurance funds by the responsible institutions prompted the President to issue a proclamation in SI 64 of 2015 to establish a commission of inquiry to assess whether the funds were administered in line with the principals and practices of pension and insurance service provision.
While pensioners languish in poverty, most insurance and pension funds are flourishing as shown by growing portfolios of real estate and decent profits.
In most cases pensioners are getting ridiculously low monthly payouts which were not even worth the bus fare and bank charges needed to access them at the bank.
At dollarisation, most investors and policyholders generally felt short-changed
Following the conversion of pension lump sum payment and contributions at dollarisation, pensioners in particular were left worse off. The abuse of NSSA funds has also not helped.
It would appear NSSA at one time became a lender of last resort as it embarked on a mission to bail out ailing banks, even those that seemingly did not have chances to recover.
A report by National Economic Conduct Inspectorate reveals that at one point NSSA was exposed to the tune of $200 million through direct equity investments, loans and money market investments at mostly indigenous banks which later on faltered.
Sadly, it is difficult to identify some of the projects NSSA has successfully funded.
There is need to re-look at the governance of this institution so that it starts to serve the interests of its major stakeholders – the contributors. At household level, Zimbabweans have remained serial consumers with high preference for luxuries.
They splash money on ostentatious goods, stay in world-class mansions and drive top-of-the-range cars, most of them funded from debt.
As at June 30 2016, individual borrowers accounted for the biggest share of total bank borrowers at 16,57 percent.
They also accounted for the biggest share of outgoing foreign payments at 25 percent. The consumptive behaviour of individuals can also be attributed to the limited availability of suitable investment avenues and lack of trust with financial institutions.
Given the importance of savings in the growth matrix of Zimbabwe today, the following policy advice is proffered:
At Government level, reduce the budget deficits through the following;
Trim Government
Privatise the parastatal which are draining the fiscus. Implement the recommendations from the commission of enquiry into the conduct and practice of pension funds and insurance companies. Compensate the affected persons in line with outcome out the enquiry. Implement investor-friendly policies, which may require amendment of some investment policies to suit global realities. Persistence Gwanyanya is an economist, banker and member of the Zimbabwe Economics society who writes in his personal. You can e-mail your feedback on percygwa@gmail.com or Whatsapp on +263 773 030 691.