Financial sector GDP contribution declines

via Financial sector GDP contribution declines – DailyNews Live by Kudzai Chawafambira  3 OCTOBER 2013 

The financial sector’s contribution to gross domestic product (GDP) has declined to its lowest since adoption of the multi-currency system in 2009, according to Zimbabwe Economic Policy Analysis and Research Unit (Zeparu).

The institution said the sector’s contribution has declined to posting an average of 4,1 percent from close to 10 percent.

It indicated that a lack of confidence in the banking system, low savings, poor liquidity buffers and uncertainty regarding tenor of multi-currency system coupled with absence of a local currency were some of the major challenges underpinning the sector’s depressed performance.

This comes as the financial services industry’s contribution to GDP recorded a peak of 8,4 percent in the period of economic deregulation and liberalisation during the 1991 to 1999.

“Financial sector reforms relaxed bank entry requirements, indirect monetary policy instruments and introduced flexible interest rate policy.

“However, between 2000 to 2008 there was a crisis period of bank closures, curatorships, liquidations, domestic and foreign currency shortages, hyperinflation and negative economic growth rates,” said Zeparu.

The research unit said the introduction of multi-currency system brought about stability and growth, “but this was one of the many ways to achieve full economic recovery.”

“Dollarisation is not a complete panacea but a stop gap measure that lays foundation for future sustainable economic growth.

“Complementary structural changes need to be introduced to reap full benefits of dollarisation,” it said.

Zeparu also noted that a stable political environment needed to be maintained in order to reduce country risk and attract investment.

“More conducive environment for long-term production is required for revival of real sectors. Despite challenges faced, the financial sector has displayed resilience. However, contribution of the sector to the economy needs to be enhanced,” it said, adding that the current financial regulatory and supervisory model was no longer adequate for Zimbabwe as indicated by bank failures and loss of public confidence in the financial sector.

“It was recommended that Zimbabwe address the weaknesses identified in various pieces of legislation (including the Deposit Protection Corporation Act, the Reserve Bank of Zimbabwe Act and the Banking Act of 2000) and urgently incorporate prudential regulations and guidelines (Basel II and III) into the Banking Act,” it said.

Zimbabwe needs to implement either the integrated approach to regulation and supervision while working towards adopting the twin peaks model in the long-term or directly implement the twin peaks model.

“Both the twin peaks model and the integrated approach are recommended in economic literature for sub-Saharan Africa. However, the twin peaks model is highly recommended following the global financial crisis of 2007-2009,” the report indicated adding that capacity constraint issues are best resolved by amalgamating the various multiple regulators and resources, thereby minimising duplications.