Oil price fall, naira devaluation, and challenge of savings

Hard times are here! The living standard of Nigerians will no longer be the same as long as the drop in government’s oil revenue lasts.

On Friday, November 27, the price of Brent crude fell more than $6 to $70 per barrel (pb) after the meeting of Organisation of Petroleum Exporting Countries (OPEC) ministers in Vienna left output ceiling unchanged despite huge global over supply.

With this remarkable shift away from its long-standing policy of defending prices, oil price decline is likely to continue indefinitely, putting government and its budget benchmark to task.

Given that low external reserves expected to cover only six months import guarantee and government claims of inexistent buffer, the picture of the hard times ahead is total.

Impact on populace

What the emerging scenario means is that more of us have to take a hard look at our earnings and savings, investments, and everything else. How are we likely to be affected?

Abuja is leading the way by announcing some austerity measures, and the Central Bank of Nigeria (CBN) moved ahead to devalue the naira by 8 per cent.

The CBN also hiked cash reserve requirement (CRR) on private sector deposits by 500 basis-points from 15 per cent to 20 per cent.

Benchmark interest rate, the rate at which banks borrow from one another, was also was raised from 12 per cent to 13 per cent, implying increase in the cost of borrowing.

Now, manufacturers and business men will borrow money from banks at higher cost, which will be passed on to consumers in the higher cost of goods and services.

The CBN has already pulled N568 billion from the banking system to meet banks’ new requirement on private sector deposits. Less cash will be available for banks to do business with.

Even at 6.3 per cent economic growth rate at the end of the third quarter of this year, the earning power of the citizens faces a significant shrink, and so are savings and investments.

In other words, Nigeria’s growth has been less than inclusive and has not yielded much prosperity in the lives of individuals, making it difficult to save.

This has been termed jobless growth for its inability to generate jobs, a situation attributable not only to the mono-cultural and unbalanced structure of the economy, but also the near absence of savings and meaningful investment.

Saving out of devaluated naira

With the devaluation of the naira, the average man on the street has to decide whether to take coffee, tea, or just water, said an analyst.

Citizen’s disposable income will reduce, the government’s capital expenditure will also be slashed.

There is potential inflationary pressure as a result of the devaluation in the exchange rate and other factors.

The tendency is for companies and entities to pass costs on to consumers, and those unable to do so are bound to reduce production, record lower profitability and may consider reducing staff strength to remain afloat.

In times like this, cash savings will suffer fleeting value, and get outpaced by rising costs.

The best savings are those in form of investment in value assets such as capital assets, landed property, household appliances, and equipment that hold value overtime.

To do just this, people will have to give up some things. A strong correlation exists between earnings, savings, and standard of living.

Saving from little income

No matter how little an income is, it is possible to save part of it if the urge to spend (propensity to consume) is curtailed.

FBN Asset Management Managing Director/Chief Executive Officer, Michael Oyebola, said the idea of mutual funds as an effective means of saving money “needs to be brought to the attention of Nigerians as most people are not aware that it can help them make more money while saving, no matter how small or large amount of money they have.”

He described a mutual fund as a fund approved and regulated by the Securities and Exchange Commission (SEC) that investors invest in which professional fund managers invest on their behalf.

Such a fund offers access to many more securities such as treasury bills, federal government bonds, state government bonds, stocks and many more, and more investment leads to more growth.

With as little as N5,000 a person can invest in FBN Money Market Fund because the fund, which pays 10.50 per cent interest per annum compared to savings account that pays 3 per cent.

How people living below N200 a day save

Finance experts believe that the government has to lead the way and strike a balance in the interest rate regime because a fall in interest rate will tend to increase the profitability of firms and they may pay higher dividends to shareholders thereby making more money available for savings.

This can also trigger an increase in household spending.

In the same way, a rate fall makes savings less attractive and property more attractive, increasing the value of property and household wealth.

Experts advised low salary earners to make coffee at home or work, and instead of spending N500 a day on breakfast and launch, less should be spent by taking food along to work.

Another advice is to optimise transportation. Those who live in a city with organised public transportation can buy a monthly metro pass to cut costs. Where there is no access to efficient public transportation, carpool with co-workers who live nearby can help.

Experts also recommend cutting down cable bills and keeping a budget that helps one pay detailed attention to spending habits. It prevents spending beyond means and finally, low income earners can take cheap wine. No further explanation required.