Nigeria’s high inflation problem has a corrosive impact on savings and is complicating the government’s efforts to give fragile economy a much-needed boost.
Inflation rate has declined for three consecutive months, but Nigerians are unable to heave a sigh of relief, not when prices are still rising at a rate of 17 percent, with supply chains still fragile and insecurity across geopolitical zones worsening.
At 17.75 percent in June, Nigeria’s inflation rate is still far behind the Central Bank’s goal of a single-digit inflation rate. The last time Nigeria recorded a single-digit inflation rate was in January 2016 and it was 9.6 percent.
The high rate of inflation does little favours for Nigeria’s already low savings rate.
Nigeria has one of the lowest savings rates globally. According to the International Monetary Fund, the gross savings rate in Nigeria stood at 13.9 percent in 2019, far behind China at 45 percent, and even below Tanzania (24.8 percent), South Africa (15.8 percent) and Togo (21.2 percent).
The savings rate probably worsened last year due amid low-interest rates on savings.
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Higher savings help to finance higher levels of investment which would boost productivity and economic growth but with high inflation and low-interest rate on deposits, Nigerians are discouraged from savings.
Inflation rate is the rate at which the change in prices happens; this is usually expressed in percentages over time. For instance, if inflation goes up 10 percent than last year, it means purchases will cost 10 percent more than they did last year.
Basically, inflation reduces the value or usefulness of money; the higher inflation rises, the less money is worth in real terms as time goes by. Therefore, inflation reduces purchasing power.
When inflation rises, savings are worthless with each passing year, especially when the interest rate is lower.
Last year, the central bank introduced a policy that slashed the minimum interest rate banks pay on savings deposits to 1.25 percent from 3.75 percent.
By reducing the interest rate on saving deposits, it means when money is kept in a savings deposit account, a minimum of 1.25 percent will be paid by the bank on your savings every year. With inflation at 17.75 percent, that is a negative interest rate of 16.5, this is more like paying the bank for keeping your money.
“Savers who have to earn below inflation rate return on their savings would see the value of their money eroded. Thus, by the time repayments are made, the purchasing power of the saved money would be lower, which implies lower income, lower demand and lower output,” Ayorinde Akinloye, a research analyst at United Capital Plc said.
Saving money should provide a safety net for people in case of emergency but when inflation erodes its value, it increases economic hardship.
Savings can save the economy
While personal savings is vital for an individual’s financial well-being, it is also very crucial for economic growth.
On an aggregate level, savings are a veritable tool for economic growth and development. In particular, savings allow the necessary investment to improve a country’s capital stock and its long-run growth trajectory.
Nigeria recovered from its second recession in five years in the fourth quarter of 2020. The 0.51 percent real gross domestic product (GDP) growth recorded in the first half of this year shows the tepid nature of its GDP growth.
Nigeria needs to increase its level of investment to achieve the growth needed to boost the economy.
“For our stage of development, we need a lot of investment spending for us to boost our long-term growth potentials,” Omotola Abimbola, a macro-Economist at Lagos-based Chapel Hill Denham.
Nigeria has one of the lowest savings rates globally. According to the International Monetary Fund, the gross savings rate in Nigeria stood at 13.9 percent in 2019, far behind China at 45 percent, and even below Tanzania (24.8 percent), South Africa (15.8 percent) and Togo (21.2 percent).
With consumer prices rising and incomes stagnating, many people cannot afford to save.
