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Recovery of the financial sector and building financial inclusiveness
Makina, United Nations Development Program (UNDP)
July 24, 2009
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This paper is
part of the Comprehensive Economic Recovery in Zimbabwe Working
paper evaluates the prospects for recovery of the financial sector
and achievement of financial inclusion. It starts by giving a historical
perspective of the financial sector while tracking performance over
critical periods. The paper concludes that the sector's performance
has not been responsive to the needs of the wider economy. Another
key feature of the development of the sector is that it lacked inclusiveness
as it did not adequately cater for the needs of the poor and the
marginalized small-scale business sector. A disturbing 70 percent
of the population remained unbanked at the end of
sector faced many challenges arising mainly from disorderly macroeconomic
conditions characterized by hyperinflation and policy inconsistencies.
In particular, the Reserve Bank presided over quasi-fiscal activities
that fuelled hyperinflation. This undermined financial intermediation,
resulting in the public losing confidence in the banking sector
with a further deterioration in terms of financial inclusiveness.
The paper further
observes that from 2002 onwards price distortions emanating from
controls became so severe that the analysis of official statistical
data produced perverse outcomes. By the end of 2008 the distortions
had become so severe that authorities formalized dollarization that
had de facto become widespread over the years. Dollarization has,
however, presented its own challenges. While it stabilized inflation,
it has had a profound effect on the banking sector whose capital
levels had been eroded by hyperinflation. Drawing from international
experience and best practices, the paper discusses policy options
for both recovery of the financial sector and for building financial
inclusiveness as the country goes forward.
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