Why Saving In Naira Is Looking Unpopular


Saving in Nigeria is increasingly looking unpopular as negative real returns due to high inflation are worsening the saving culture for Nigerians.

Nigeria is also not alone in this debacle. Across the world, Central Banks continue to adjust interest rates, as part of efforts to curb inflation. Notably, when interest rates rise, it affects economic participants differently (i.e. consumers have to curb spending, however, savers tend to benefit immensely).

Specifically, investors with excess cash to spare can now deploy some of their cash to fixed income securities to earn interest at higher rates (i.e. money market, fixed deposits, and fixed income securities tend to benefit from rising interest rates, such that significant portions of asset allocation realign towards interest rates products).

Why Saving In Naira Is Looking Unpopular

However, the key idea is that returns on these fixed-income products need to exceed inflation rate. The economic term is “real rate of return”.

SKYTREND NEWS’ audience will be familiar with this term as the annual gains on an investment which is adjusted for inflation.

As an example, if you earn 15% on an investment but inflation is 8% pa then your Real Rate of Return is 7%. This is a positive real rate of return. Conversely, if inflation was 20% pa then for the same investment, you will have -5% or a negative real rate of return.

A positive Real Rate of Return in an economy encourages people to save more in that economy and currency. Conversely, a negative Real Rate of Return seeks to discourage folks from saving in that economy.

For many economists, tracking the real rate of return on investments is critical. Especially as the level of savings in your economy is a fundamental source of investments to grow GDP.

SKYTREND NEWS readers will be familiar with the GDP equation (GDP = C+I+G+Nx) whereby the I refers to Investment.

In other words, the more folks are encouraged to save, the more funds are available domestically to invest and grow the GDP of the country.

Advanced countries such as UK and US are often keen to drive positive real rates of return such that the government of these nations have dedicated inflation-protected investments.