How the economy affects your wealth

Economics is divided into microeconomics and macroeconomics. Simply put, microeconomics studies segments of the economy like banking sector or labour market. Macroeconomics studies the whole economy – how different forces interplay and affect the microsegments like personal wealth. During the 2016 Naira devaluation Africa’s richest man moved from the Forbes Top 20 List richest people to above 100. He worked hard I am sure, made additional investments and managed his finances with professional help – but the macroeconomic force of FX devaluation affected the rate at which his Naira dominated wealth was converted to US dollars and so his wealth was eroded. Therefore, individuals living in an economy must identify the different macroeconomic factors impacting their financial well-being and manoeuver around them.

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Gross Domestic Product (GDP)is simply the monetary value of all the goods and services produced in a country in one year. It measures how rich a country is. It affects standard of living, unemployment, quality of life etc. It should be growing quarterly. If it drops in  two  consecutive quarters, the economy is in recession like we had in 2017. Nigerians complain that we cannot feel the growth in GDP. There are 2 main reasons for this – growth may be happening in sectors that do not impact the lives of ordinary citizens and secondly, as is the case in Nigeria, population is growing faster than GDP. The economy is growing, but there are more mouths to feed, so the citizens are not wealthier.

Fiscal policy of the government affects us through the taxation. Personal income tax rate affects how much of your income is left to spend on lifestyle maintenance and investments. As our income increases, we move to higher tax brackets and higher percentages are deducted for tax. We also pay 10% withholding tax on income earned from investments in the money and stock markets. Companies also pay taxes of 35% of their profits. This affects how much they have to pay as dividend to shareholders, which affects our own Return on Investment in those company shares.

Monetary policy of the Central Bank affects us through interest rates. CBN’s Monetary Policy Rate (MPR) is the rate on which commercial banks base their own deposit and lending rates. The higher the MPR, the higher interest you would earn on your fixed deposits and you make more money. But it also means that borrowers pay higher rates on their loans. Borrowers like manufacturers (of food, beverages, toiletries etc.) and service providers (e.g. telecoms, airlines, hotels etc.) would have their costs of production increase. These additional costs are passed to consumers as higher product prices.

Foreign exchange rate is another factor that affects Nigeria a little more than usual because we are an import dependent country. A great proportion of the things we use are imported – look around the room you are sitting in at this very moment, how many of the things you can see are locally made? So, if the exchange rate goes up, prices of products (and your cost of living) go up too. Many of our so-called manufacturers are overly dependent on imported raw materials. For instance, Cocoa goes from Ondo state to Europe where it is turned into Cocoa powder, which beverage manufacturers then import for use in their Nigerian factories. FX rate even affects price-controlled products like petrol. The importers bring it in at above N180 per liter but sell it at N145. If the federal government does not timeously reimburse them with the subsidy, they stop importing & the queues would return. However, higher FX rate is good for States governments. The money shared to states monthly in Abuja is majorly from crude oil sales made in US dollars. So, if the exchange rate is higher state governments get more Naira and hopefully can pay salaries as and when due.

Inflation is another rate that affects our wealth because it erodes the value of money by reducing what the money can buy. If you put N1m in fixed deposit at 9% for one year, you get N81,000 interest after tax. But inflation is around 11%, so, your N1m lost N110,000 purchasing power. Therefore, we should look out for investments that deliver higher returns than the inflation rate.

Macroeconomic indices no doubt affect our financial well-being; let’s we ensure we invest in assets that help us maneuver around those factors and take advantage of our economic circumstances.

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