Hike the minimum wage but accept the implications

Nigerian public employees are poorly paid in a developing country context, and deserving of the increase in the national minimum wage that is under discussion within a tripartite commission (government, employers and organized labour). We can carp at the timing of the discussions within the electoral calendar, and we can identify a repeat of 2010. Once we are through with the carping, we can acknowledge that governments worldwide like to offer sweeteners to the population in their quest for re-election.
A wage rise is doubtless warranted on social grounds, and may bring motivational benefits too. From the macro perspective, however, there is considerable downside. Fiscal data on personnel spending, rather than the broader category of recurrent expenditure, is patchy, and for state governments in aggregate is particularly weak. Another complication is that personnel spending can exclude or include pension payments.
The build-up to the elections in 2011 is instructive for our purposes. Personnel spending by the FGN increased by 24 per cent from N1.4trn in 2010 to N1.7trn the following year, and so reflecting the then new minimum wage of N18,000 per month. The FGN’s annual bill remained within a range of N1.6trn to N1.7trn though to 2015, and the approved 2018 budget projects spending of N2.1trn on the personnel of ministries, departments and agencies (MDAs, perhaps a broader measure than in the earlier CBN series).
Clearly we have no idea what conclusions the tripartite commission will reach. Labour’s reported push for a more than threefold increase is unlikely to be settled in full. We should expect a compromise, and perhaps some staggering of the increase that is agreed. To calculate its impact, we need to know the number of employees on the minimum wage of course, but also make allowances somehow for adjustments to the salaries of all others so that pay differentials are maintained.
Such wage increases push up recurrent spending. This can be directly translated into less fiscal space for capital programmes, assuming (as we do) that the FGN is fiscally responsible. They also raise the oil price threshold required in the budget to cover the FGN’s spending commitments, and so blunt the efforts of the federal government to diversify the economy away from oil.
The solution is to transform revenue collection, notably from the non-oil economy. That way, the authorities would be able to pay their employees a reasonable salary and to spend in line with the size of their economy. Total FGN expenditure in the 2018 budget represents little more than 8 per cent of forecast GDP, and is unlikely to be disbursed in full. In peer countries, the ratio is at least 15 per cent and often more than 20 per cent. The gap is huge, even when we allow for Nigeria’s federal system (and the fact that we are citing data for the FGN alone).
Revenue enhancement is underway, and the authorities have devoted time, manpower, technology and external technical expertise to the case. In the 2018 budget the FGN is projected to collect revenue equivalent to about 6 per cent of GDP, and we expect that this will be overambitious. The tax amnesty (VAIDS) could be the game-changer in the short term: we suspect, however, that if the operation has been a stunning success, the federal finance ministry would have shared the good news.
Gains are more likely to be steady. We might also be pleasantly surprised by the petroleum industry governance bill. To be realistic, we should accept that the FGN is serious about non-oil revenue collection and that progress will be unspectacular for well-documented reasons. The administrative capacity of the revenue agencies is weak, harmony between relevant departments is poor, the informal sector is huge and there is a prevalent culture of not paying (because the reciprocal benefits are elusive). E-payments, the growth of mobile money, computerization, data sharing and mining between departments, and growing international regulation will all help over time. For now, we urge realism and patience.
The FGN will be able to pay the new minimum wage because it can borrow. The state governments, in contrast, have been bailed out by five separate debt relief packages by the FGN. In return, their freedom to borrow has been severely curtailed with a few exceptions such as Lagos State. The states, most of all those termed oil-producing and so enjoying the 13 per cent derivation formula, are seeing the benefit of the higher crude price and the recovery in crude output in the regular distributions of federation account balances. This bonus notwithstanding, a good number of the state governments, perhaps as many as one half, are still in arrears on their salary and pension payments to their staff.
In passing, we should mention two other implications of a sizeable salary hike: a push to inflation, which featured in the MPC’s communique after its meeting last week, and a challenge to small businesses that may struggle to pay the higher amounts.
To conclude, a hike in the national minimum wage is on its way, and the timing of the discussions is easily explained. On the surface we may think that the FGN, if not all states, can afford it and that the damage may look limited. Yet until the FGN is able to collect revenue at far higher levels, at or close to 20 per cent of GDP rather than the current 6 per cent, such hikes merely reduce the scope for sorely needed capital/infrastructure programmes and increase the economy’s dependence on the oil price.

Gregory Kronsten
Head of Macroeconomic and Fixed Income Research
FBNQuest Capital