Over long periods of time, Ghana’s economy has experienced consistent inflation. Inflation is bad for business. It raises the cost of goods and services. As a result, people are unable to purchase what you are offering. Consider what happens when fuel prices, electricity & water bills rise. Inflation has a negative impact on businesses because it causes consumers to cut back on their spending. Because of inflation, everyone make hot.
However, there are ways to protect your business or investment from the negative effects of inflation. One of these methods is to use Inflation-Linked Bonds (ILBs).
Inflation-Linked bonds (ILBs) “refer to securities that link their capital appreciation, or coupon payments, to inflation rates; allowing the variables to be adjusted in the same direction as changes in prices”, the B&FT explained.
In layman’s terms, ILBs are bonds whose interest rates are linked to inflation. As a result, if inflation rises, so will their interest rates. For example, the ILB’s rate may be 3% at the beginning of the year. But if inflation goes to 10%, the ILB’s rate will also rise to 10%. Some bond issuers can go above and beyond the inflation limit.
Inflation-Linked Bonds (ILBs) can be issued by central banks and large corporations. Some countries that issue ILBs are the United Kingdom, Canada, Brazil, the United States, India, Mexico, South Africa, and Israel.
According to B&FT, Joshua Adagbe, a Senior Research and Compliance Analyst at Tesah Capital, is urging Ghana to issue ILBs to protect its investors from the country’s inflation. This way, you can buy an ILB and use the proceeds to offset the effects of inflation on your business. Because you will be aware that as inflation rises, so will your return on the Inflation-Linked Bond investment.
Nonetheless, Nana Wiafe Boamah, President of the Chartered Financial Analysts (CFA) Society in Ghana, disagrees with Adagbe on this matter. According to B&FT, Boamah believes that because inflation persists in Ghana, ILBs are not a good idea for the country. According to him, ILBs can be introduced in Ghana once inflation is under control and the country’s finances are in good shape. Otherwise, the government will be forced to pay high-interest rates on these bonds.
But, if inflation is low, will you invest in ILBs with low-interest rates? And, if ILBs are introduced, will they not motivate the government to work hard to control inflation in order to avoid paying higher interest to Inflation-Linked Bond investors?
When inflation rises, as an investor, you will benefit from Inflation-Linked Bonds (ILBs). And when inflation falls below a certain level, your business will thrive. As a result, the introduction of ILBs into Ghana will be a double-edged sword. That is, however, food for thought.
The most important thing to remember about ILBs is that when the inflation rate falls (i.e. when there is deflation), investors will lose money.
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