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By Chinwendu Obienyi
The National Bureau of Statistics (NBS) in January 2023 released its December 2022 inflation report and, for the first time in many years, there was a sigh of relief as headline inflation declined by 12 basis points from N21.47 per cent recorded in November 2022 to 21.34 per cent.
Also core inflation stood at 18.49 per cent from 18.24 per cent while food inflation also stood at 23.75 per cent from 24.13 per cent year-on-year (y/y). However, despite the significant increase in fixed income rates (average treasury bills rate increased from January 2022 to 10.7 per cent of November 2022), the real return of savings and investment remained on the negative. Hence, it is pertinent to see why people did not necessarily celebrate the inflation news.
Inflation is the rate of increase in prices over a given period of time. It is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country. Due to inflation, a naira today will buy less goods and services this year or next 10 years (a reduction in the purchasing power of money). It is therefore essential to employ the right strategies to hedge against inflation because despite the country’s bright indices, the current crisis could cause inflation.
Thus, the question is how can one reduce the impact of inflation on one savings?
As a new investor, one may be discouraged by the potential return on your savings or investments as you might consider it too low due to the inflation rate. However, because of the negative impact of inflation, you should not leave your funds idle in your bank account. For instance, if you invested N1 million in a fixed income instrument at 10 per annum, the expected interest after one year will be N100,000.
This may be discouraging but leaving your funds in your bank account will be worse. The real value of your savings after one year, assuming it’s the November 2022 inflation rate, will be N785,343, hence your savings would reduce by N214,657 in real terms. If you invest in fixed income, you would have reduced the impact of inflation by N100,000 thereby limiting the reduction in the real value of your savings to N114,657.
Some of the investment strategies to consider are:
1. Bonds – If you have zero tolerance for risk and a short term investment horizon, you can invest in T-Bills instruments (average yield at 8 per cent). Although it offers a low interest rate compared to other forms of fixed income investments like commercial papers and fixed deposits. The minimum amount can be as low as N100,000 depending on the investment outfit.
2. FGN Bonds – For investors with a low-risk appetite and long term investment horizon, investments in Federal Government Savings Bonds will be recommended. The minimum investment is N5,000 and it is issued monthly. The November 2022 offer for two and three year bonds was issued at 12.25 per cent and 13.25 per cent per annum respectively. One is likely to earn this return for the next 2 to 3 years as interest is paid every three months (quarterly) i.e paid directly to your registered bank account.
3. Commercial papers – For investors with moderate risk appetite, investments in CPs will be recommended as it commands a higher interest rate than treasury bills. It is important that the issuer is highly rated before investing.
4. Dollar denominated assets- This can be in the form of investment in dollar mutual funds, dollar savings, Eurobonds or foreign stocks. The naira value of your investment increases when the naira gets devalued, hence reducing the impact of imported inflation.
5. Alternative assets – This is for investors with a high risk appetite. Some suggested investment options include; real estate, agriculture and this requires a high level of due diligence before committing.
To reiterate, doing nothing should not be an option but the focus should be on reducing the impact of inflation on your savings.
