Decline in savings rate decimates economy: RBZ

Zimbabwe has experienced significant decline in its savings rate that plummeted from 26 percent of the country’s Gross Domestic Product (GDP) in 2019 to 17 percent in 2023, according to Dr Innocent Matshe, Deputy Governor of the Reserve Bank of Zimbabwe (RBZ).

The fall in the savings rate reflects a broader economic malaise in Zimbabwe, driven by a combination of hyperinflation, currency instability and lack of public confidence in the banking system that developed over a long period.

“This in turn will lead to lower economic growth as there are no loose funds to invest,” said Dr Matshe during the Monetary Policy Symposium organised by the Tripartite Negotiating Forum (TNF) in Harare last Friday.

Savings rates vary widely across countries for various reasons, including factors such as income, low taxes, oil wealth and foreign investment among others.

According to the World Bank, lower middle-income countries should have a savings rate of 30 percent in order for them to develop and be less dependent on debt.

Botswana and Zimbabwe are neighbours and have close economy size of US$47 billion and US$59 billion respectively, but Batswanas save almost twice as their counterparts. The savings to GDB ratio in 2022 for Botswana was 30 percent whilst in Zimbabwe it was 16,6 percent.

Dr Matshe told delegates during the symposium that lack of loose funds to invest will continue to hinder economic growth, creating a challenging environment for both individuals and businesses in Zimbabwe.
The 2008 financial collapse in Zimbabwe left an indelible mark on the nation, eroding trust in formal financial institutions and regaining the lost confidence has haunted the country todate.

As a result, many Zimbabweans have resorted to keeping their money at home rather than depositing it in banks, contributing to a growing informal economy where traditional saving mechanisms are bypassed.

Economist, Gladys Shumbambiri-Mutsopotsi, sees this decline in the savings-to-GDP ratio as deeply troubling and having far reaching consequences to the economy today and in the future.

“Although it is not surprising because we have seen an increase in the cost of living… higher expenses for essential goods and services have left individuals and businesses with less disposable income to save.

Additionally, inflation has eroded the value of money, making savings less valuable over time. This is why we are here and may remain there for sometime.”

Shumbambiri-Mutsopotsi further highlighted other contributing factors such as increased rent expenses and unattractive interest rates. “Political or economic instability has also led to reduced savings as individuals and businesses have become more risk-averse,” she added.

Inflation has been a persistent issue in Zimbabwe, with the annual rate exceeding 200 percent in 2023. This hyperinflationary environment has drastically diminished the purchasing power of the Zimbabwean dollar, forcing households to deplete their savings to cover daily expenses.

Economist, Dr Prosper Chitambara, underscored the detrimental impact of inflation on savings.

“We need stability to sustain macroeconomic stability, low and stable inflation rate. It is critical in terms of incentivising people to save,” he said.

“Zimbabwe has traditionally been a consumption-driven economy, high consumption and obviously that has affected our savings.”

Dr Chitambara believes a shift in economic behaviour is essential. “We need to reorient our spending away from consumption towards saving and investment, but all this begins with competitive remuneration which covers all the basics without having a headache.

Because saving is critical for generating resources that are necessary for investments; without savings, we cannot invest,” he added.

Comparing Zimbabwe to China, where the savings-to-GDP ratio averages around 40 percent, Chitambara stressed the importance of stability in fostering a culture of saving.

The repercussions of declining savings are severe and far-reaching as lower savings leave individuals more vulnerable to financial shocks, exacerbating poverty and hindering economic growth.

“Lower savings may mean less investment in education, healthcare, and other essential areas, perpetuating poverty,” Shumbambiri-Mutsopotsi said.

“It leads to reduced investment, hindering economic growth and poverty reduction efforts as well.”

The drop in the savings rate signals a broader economic distress faced by Zimbabweans. Savings are often viewed as the backbone of economic growth, fueling investment and development.

With less money being saved, there are fewer resources available for investment in critical sectors such as infrastructure, education and healthcare. This creates a vicious cycle where lower savings lead to lower investment, which in turn stymies economic growth and exacerbates poverty.

Inflation has not only eroded the value of money, but also diminished the purchasing power of the Zimbabwean dollar. The cost of basic goods and services has skyrocketed, making it increasingly difficult for individuals to save any portion of their income.

This inflationary pressure is compounded by frequent price hikes in essential commodities such as food, fuel and healthcare, further straining the budgets of ordinary citizens.

Currency instability has exacerbated these economic challenges as the Zimbabwean dollar had been subject to severe fluctuations, eroding trust in the local currency and prompting many to seek refuge in more stable foreign currencies such as the US dollar.

However, access to these foreign currencies is limited, and exchange rates are often unfavourable for the average Zimbabwean. This uncertainty discourages saving in local currency, as any savings could be quickly devalued by sudden currency depreciation.

The soaring cost of living is another critical factor contributing to the declining savings rate and with inflation driving up prices, the cost of living has become untenable for many Zimbabweans.

Housing, utilities and transportation costs have all surged, consuming a larger share of household incomes which leaves little room for discretionary spending or savings. Many families are forced to prioritise immediate survival over future financial security, leading to a decline in overall savings.

The decline in the savings rate is not just a statistic; it reflects the harsh economic realities faced by Zimbabweans. Without significant changes to economic policy and efforts to restore public confidence in financial institutions, the prospects for reversing this trend remain bleak.-ebusinesweeklyt