One important element of any expanding economy is the mobilisation of domestic savings, money that individuals and companies do not need immediately and which can be placed somewhere in the banking system, combined with other savings, and then lent out to those who need loans.
This is basically how banking started, taking deposits for variable lengths of time, and paying the depositor for the use of that money, and then lending it out to other people at a higher rate, the gap in rates being what a bank charged for profit and to cope with risks, such as borrowers not paying.
Societies which have a high order of such basic savings are said to have savings cultures. This is what helped drive the Chinese economic revolution so swiftly in recent decades. For a long time Chinese people did not borrow to buy cars or any other consumer good. Instead they saved, and then paid cash. And those combined savings were huge, enough to drive some of the fastest industrial growth in history.
Zimbabwe once had a savings culture. Most houses were bought or built using building society mortgages, and those mortgages were funded by savings from ordinary people who wanted an income, or were saving up for their deposit on a house, and because of their relationship with the society would probably have little problem converting from being a lender to being a borrower.
Other saving was less voluntary, or was not seen as saving although that is the best way to describe it. Pension funds were universal and important, and basically accumulated contributions for the working life of the future pensioner, creating a huge pool of savings in any expanding fund, and then paid out agreed monthly amounts for the rest of the pensioner’s life once they reached retirement age. But those contributions were, in effect, savings for a comfortable old age.
Then came hyperinflation. And saving stopped being sensible and became a way of losing large sums. Money stashed away lost value very quickly and in the end became worthless for all practical purposes. It was fine if you were a borrower. Your monthly payments sunk dramatically in real terms and eventually your loan also became in effect worthless and could easily be cancelled.
And that is roughly where we still are. There was some short-term saving during the dollarisation era, but people would deposit for a maximum of three months, since even with US dollars few trusted the systems that had impoverished them. In retrospect they were wise, since most of the “dollars” in circulation had been created within the Zimbabwean monetary systems and when this became obvious the savings lost value very quickly, in real terms.
And even now, with far greater stability, few would be desperate to save. One problem is the near religious worship of the annual inflation rate, which at 194 percent is still very high. The monthly rates, since September last year, have been a lot lower, but the average monthly rate still annualises at just over 50 percent, so even someone who can see the fundamentals would still want more than 50 percent annual interest for any savings, and no one offers anything like that rate.
This does not mean there is no saving, but much of it is non-productive. Many ordinary people keep their modest savings or emergency money as US dollar banknotes, under the mattress. They buy the notes on the black market and then hide them. Those savings are doing nothing. They provide no income for the holder and they cannot be mobilised for anyone else’s benefit.
On a more sophisticated level we see the same in the corporate world. Deposits in foreign currency accounts are growing. Some of this is made up of free funds being deposited, but quite a bit is from those who receive their revenue in local currency and US dollars. This could be a tobacco farmer, or it could be a net exporter having to sell some of their US revenue as payments arrive.
But the general trend of all such groups is to spend the local currency first, and keep the US dollars. But there are no interest payments while those dollars sit in the bank and the bankers cannot mobilise those deposits. Bankers can only make fee income, charging for the deposit and withdrawal of sums from these accounts.
Others invest in the Zimbabwe Stock Exchange. Now while equities, in the longish run, can preserve value if chosen correctly, few of those investments are adding anything to the stock of investment. There are either no initial public offerings or very few, and most buyers of shares on the ZSE are buying existing shares, not new shares. So when share prices rise this is as a result of supply and demand very largely, more money chasing the same number of available shares.
It is much the same in that other area of locking up cash, buying property. But most of the property being bought are existing buildings, rather than investments into new stock. So once again it is, like the US dollar bank accounts and the shareholdings, not allowing the savings to be mobilised to create new wealth, but rather juggling what already exists.
Another way that households and businesses do some saving is by stockpiling. A household might buy far more things like tins or other stuff that can be safely stored than it will use over the next month, basically ensuring that they use today’s money at today’s prices to buy things that might be more expensive later.
This clearly happens in the business world. Reserve Bank of Zimbabwe Governor Dr John Mangudya was concerned last week over importers buying more than they needed. He put it down to fear that the auction system might end, and was anxious to reassure everyone that it was here to stay.
But part of the reason might be that companies with reasonable holdings of Zimbabwe dollars, and unable to convert these to US dollars and then bank the foreign currency, might instead be spending the local currency holdings on stockpiling raw materials, or at least raw materials that do not perish. In effect they are saving, but they are saving in a warehouse. At some point this becomes impossible. Once you have reached a six months’ supply or greater it becomes ever more impossible to increase holdings.
This could even occur at a pure local currency level and among businesses that do not import but instead buy supplies from companies that make the things locally or import. To take one example, a takeaway might decide to save their surplus local cash as cases of cooking oil.
The present reforms that are slashing inflation will, in the end, result in the necessary stability that start making savings in local currency sensible again. The actual inflation rate, with we annualise the mean for the last eight months from September last year when the auctions finally stabilised the exchange rates, is around 50 percent, which is high but only just over a quarter of the 194 percent that you get when you include the last four months of the accelerating monthly rates before exchange rate stability.
And more importantly the monthly rates are tending to fall. There are ups and downs, but generally more downs than ups, so the annual rate will continue to drift down from the annualised 50 percent. That annualised rate will suddenly become the measured rate in August this year, and then it will be possible to start thinking about how to generate a savings culture.
This will require interest rates that have some connection to the inflation rate, with that need to also try and predict what the inflation rate will be, on average, during the term of a deposit. But this is not impossible.
So long as annual inflation is in double figures, savings continue to be a bit of a problem since the resulting lending rate will be high, and perhaps too high for any medium term or long term lending. So we are back to the basics: fix inflation and you start fixing the saving and borrowing rates.