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Sanderson Abel Business Correspondent
Saving entails setting a fraction of income aside for future use, thereby transferring resources over time. It facilitates consumption smoothing, which is particularly important in developing countries where incomes are often at subsistence levels and falls in consumption could have disastrous consequences.
Saving also allows the self-employed to accumulate funds for making investments in their businesses or covering shortfalls in operating cash flow.
Saving empowers poor individuals by shifting the saver’s perception of his or her situation from “a day to-day struggle to survive to a longer-term view based on planning with a growing cushion of savings.”
High levels of national savings increase the amount of domestic resources available for investment and decrease the need to resort to foreign borrowing in order to cover domestic investment and consumption demand.
Countries with low internal savings rates must borrow from abroad, which results in a debt service burden, but currently this is not possible for Zimbabwe because of the huge debt overhang.
In light of these, this clearly underlines the importance of savings mobilisation to sustain economic growth with domestic financial resources.
Domestically, the ability of the various economic agents to save will make the Zim Asset programme a success as it is hinged on using mostly domestically available resources.
In the spirit of this programme domestic resources will anchor the programme with foreign assistance coming to complement our own effort as a country.
The need to save hence starts from an individual, household, community up to the whole country. At an individual level, the need to save arises from some of the following well-argued reasons in theory and practice.
Emergency cushion — This could be any number of things: a new roof for the house, out-of-pocket medical expenses, or a job lay-off and sudden loss of income. You will need money set aside for these emergencies to avoid going into debt to pay for what you need.
Retirement — If you intend to retire someday, you will probably need savings and/or investments to take the place of the income you will no longer get from your job.
Volatility of Social Security — Social Security was never intended to be the primary source of income and should be treated as a supplement to income.
Education — The costs for private and public education are rising every year, and it’s getting tougher to meet these demands.
Without money put away in savings and/or investments, you may open yourself up to other risks as well. For example, not having enough money to pay for emergency dental care may force you into taking a loan that your savings might otherwise have covered.
At a macroeconomic level become critical as espoused in the various economic blueprints that the Government had developed from ESAP (1991-1995) up to Macroeconomic framework (2005-2006), STERP and Medium Term Plan. National saving comprises saving by households, corporations, and Government.
Despite the savings rates in Zimbabwe being positive from 1980 to 2000 there were still below what is considered the international benchmark of 30 percent of Gross Domestic Product for sustained economic growth.
From 1985 to 1991 savings rates were almost constant; this was attributable to the financial repression which had put caps on interest rates in the financial market.
The monetary and financial sector were highly regulated and subjected to various types of controls which induced financial markets distortions, negative real interest rates, credit rationing and excessive taxation of the financial sector. This had the repercussions of discouraging savings in the country because of the distortions in the financial markets.
If savings are stashed in or under a mattress, or otherwise not deposited into a financial intermediary such as a bank, there is no chance for those savings to be recycled as investment by business.
This means that saving may increase without increasing investment, possibly causing a short-fall of demand (a pile-up of inventories, a cut-back of production, employment and income, and thus a recession) rather than to economic growth.
In the short term, if saving falls below investment, it can lead to a growth of aggregate demand and an economic boom. In the long term if saving falls below investment it eventually reduces investment and detracts from future growth. Future growth is made possible by foregoing present consumption to increase investment.
However, savings kept in a mattress amount to idle resources acting as tax to the economy as there are resources not being put to productive use.
Another important pair of factors that determine the level of savings in any economy is the deposit rate and inflation rate. In order to attract deposits interest rates must be relatively high while inflation rate on the other hand should be relatively low and stabilised.
This would result in a positive real interest rate which would motivate individuals to save more of their disposable income. This brings in another important dimension which the banking public should be aware of.
Once you decide to save, you need to approach your bankers and specifically tell them your intention to save so that they advise you on the product suitable for you.
You have to make sure that the resources are not deposited in a current account or transaction account as these usually are characterised with low interest rates and transactional charges.
Once you decide to save, you need to have an appropriate savings account which gives a high return. At the moment some of these accounts are actually giving a higher return on the amounts invested once these are saved for a certain period of time.
The banks then are able to use them for on lending to clients in deficit position for similar period of time. As we go into 2014, let us develop a culture of savings in Zimbabwe. It begins with me, it begins with you, it begins with all of us.
Sanderson Abel is an economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. He can be contacted on [email protected] or on 04-744686, 0772463008
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