After months of negotiations with the organised labour and the private sector, President Bola Tinubu signed into law a new minimum wage of N70,000, which is 133 percent higher than the last one. NCHETACHI CHUKWUAJAH reports that beyond the furor, implementation of the new minimum wage holds so much for the Nigerian economy.
On Tuesday, July 30, President Bola Tinubu signed into law the new National Minimum Wage Act, which pegs the new national minimum wage at N70,000, bringing an end to the months-long negotiation of the tripartite committee comprising the organised labour unions, government representatives and the private sector.
The new minimum wage was arrived at on Thursday, July 18, after members of the tripartite committee haggled the minimum wage from organised labour’s initial N615,000 demand and Federal Government’s N62,000 stance. After days of negotiations and a two-day strike, labour shifted grounds and demanded N250,000 before President Tinubu took over talks with the union and agreed on N70,000.
While signing the new Act, President Tinubu also said the national minimum wage law will be reviewed every three years.
The new minimum wage of N70,000 is 133 percent higher than the last minimum wage of N30,000 signed by former President Muhammadu Buhari in 2019, but N545,000 lower than labour’s initial N615,000 demand.
Though the furor around the new minimum wage may have subsided, its long-term impact, especially on the economy, may just have started.
Already, the House of Representatives on July 23, passed the supplementary bill that seeks to increase the 2024 appropriation Act by an additional N6.2 trillion from an initial N28.7 trillion to N35.055 trillion. Of the amount in the supplementary bill, N3 trillion is earmarked for recurrent expenditure, while N3.2 trillion will go into capital expenditure.
With an increased budget and revenue deficit, Nigeria may resort to its only viable option –borrowing, which keeps bumping up the country’s debt portfolio, raising concerns about debt sustainability. In 2023, the Federal Government spent N7.8 trillion on debt service, representing a 121 percent increase from the N3.52 trillion spent in 2022.
According to analysts, though the review of the minimum wage remains an unbroken cycle, the impact of each review sends shocks to the Nigerian economy, especially with its macroeconomic instability as was witnessed after the Udoji Panel salary increase of the mid-1970s, except measures are taken to absorb the resultant shocks.
The analysts say the economy, due to a new and higher minimum wage, will experience three broad shocks – heightened inflationary pressure, increased money supply and possible job cuts.
Heightened inflationary pressures
As more money becomes available to spend as a result of the new minimum wage, Mr Ikemesit Effiong, Head of Research at SBM Intelligence, foresees a further exacerbation of inflationary pressures.
Nigeria’s core inflation and food inflation rate have been surging, reaching a new 28-year high of 34.19 percent and 40.47 percent, respectively in June 2024 despite the efforts of the Central Bank of Nigeria (CBN) to rein in inflation by upwardly reviewing interest rates.
Effiong, in a telephone interview with Nigerian Tribune, noted that merely increasing the minimum wage in a high inflationary environment without plans to expand the economy to absorb excess liquidity will only lead to a surge in inflation and further push for more minimum wage increases.
He said: “Increasing the minimum wage does not, in the short term it could, but in the long term, it generally does not increase the earning or spending capacity of employees because inflation often rises up to match the new minimum wage and then you have a situation where inflation has eaten the effect of the increased salaries, and labour, as well as public sector employees, begin to demand for another minimum wage rise. That is why we have to review the minimum wage often.
“It shows that merely giving people more money to spend in a higher inflationary environment does not solve the problem; it just complicates the problem, makes inflation that much more capable of catching up with people’s earnings and then they want more money. And so we have this conversation every four to five years.”
More money in circulation, less money in workers’ pockets
The Central Bank of Nigeria (CBN), through its monetary tightening approach, aims to curb excess liquidity (money supply), which rose by 2.11 percent to N101.34 trillion in June from N99.24 trillion in May 2024, representing a 56.15 percent increase from the N64.90 trillion recorded in the corresponding period of June 2023.
To achieve this, the CBN limited cash withdrawal to N100,000 daily and N500,000 weekly as well as increasing the benchmark interest rate by 50 basis points to 26.75 percent from the May rate of 26.25 percent at its 296th Monetary Policy Committee (MPC) meeting in Abuja on Tuesday, July 23.
In response to the increased currency in circulation (CIC), which increased to an all-time high of N4.1 trillion, marking a 56 percent year-on-year (y-o-y) increase compared with N2.6 trillion in July 2023, analysts at FBNQuest said: “While the increase in CIC (currency in circulation) may suggest improved economic activity in nominal terms and higher consumer spending, it also highlights the risk of inflation, particularly if money supply growth exceeds real output growth.”
Given this, Effiong said the increase in the minimum wage will push up the spending power of low-income earners who tend to spend more on food and necessities, leading to more demand for goods relative to low supply except the economy is expanded to absorb the increased liquidity.
He said: “It would increase the spending capacity of low-income workers and what economic research has shown is that lower-income workers tend to spend a larger proportion of their earnings rather than save it. So, that would mean that all of this new spending will go into the economy and you would have aggregate demand rise relative to supply.
“Now, in an environment like Nigeria’s where supply is constrained by infrastructural challenges, by insecurity and also by regulation, which makes the cost of production a bit more expensive, that would lead to what economists call demand-pull inflation, which is that the rise in demand incentivises producers to increase the price of what little goods they are able to bring to the market.
“So, both minimum wage earners and those who don’t earn at the minimum wage, with rising pay packets, will spend more. And that will put pressure on the economy, it will put pressure on prices and the effect of that will be generally to lift prices.”
On his part, Dakuku Peterside, a former Director-General of Nigeria Maritime Administration and Safety Agency (NIMASA) said the wage increase will further squeeze the pockets of small and medium-scale enterprises (SMEs) given the already heightened operational environment.
He said: “Inflation will worsen, small and medium scale businesses (SMEs) barely managing to survive will be hugely impacted and the cost of doing business will skyrocket. How many SMEs can afford this increase? Most of the companies are struggling with paying the existing minimum wage, given the rise in the cost of doing business, interest in loans is over 40 percent, the cost of raw materials is over the roof, consumers with little income are squeezed to a pulp by the constant increase in prices.”
Job cuts may be imminent
With a higher minimum wage, analysts believe employers, especially in the private sector, may have to lay off some employees in order to shore up their wage bill.
This, they said, will further add to the unemployment rate in the country that already rose to five percent in the third quarter (Q3) of 2023 from 4.2 percent in Q2 2023. Recall that the National Bureau of Statistics (NBS), in 2023, revised the unemployment rate assessment methodology, which saw the unemployment rate drop from 33 percent in Q4 2020 “in line with international best practices.”
While job cuts may not happen in the public sector, private sector employers with large employees on their payroll may be forced to go the job cut route to match the new minimum wage.
According to Peterside, SMEs will also suffer the same fate as they and the private sector are the major employers of low-wage workers, who comprise most of the Nigerian workforce.
Peterside said: “The problem with government-induced increase is that only a limited number of workers, civil servants at the federal level, will get the money; many states may claim they need the means to pay that. Even if the state civil service pays that, combined with the federal civil service, they make up less than 25 percent of the employed workforce in Nigeria.
“Most of our workforce comprises low-wage workers, whom SMEs and organised private sector firms employ. These small businesses are struggling to pay N30,000 per month minimum wage, much more than the new minimum wage. This minimum wage will make these workers poorer if they do not get it like the civil servants because they all buy from the same market.”
Corroborating this stance, Dr Yusuf Muda, the Chief Executive Officer of the Centre for the Promotion of Private Enterprises (CPPE), said: “There are macroeconomic headwinds, there are structural impediments and there are multidimensional supply chain challenges. The profitability and sustainability of many businesses are at risk.”
He added that considerations for cost of living challenges and difficult operating environment “matter in this conversation and require some delicate balancing. It is only a thriving business that can retain or create new jobs.”
Effiong added: “For the Nigerian businesses that belong to large enterprises, which are already labouring under all of the traditional infrastructural challenges, things like power, things like roads, as well as insecurity, as well as foreign exchange challenges, the difficulty with which to import and even export goods out of Nigeria, this is going to be another additional cost pressure on them.
“So, there will be retrenchment, there will be sacking, there will be resignations, whether voluntary or forced, in order for the people who remain to get a pay bump. So, even if salaries increase on the private sector side, it often comes at the expense of labour participation, that is the total number of people who are employed.
“In a way, one of the after-effects of increasing the minimum wage may be to somewhat bump up the unemployment rate, especially the private sector employment rate. Why you really don’t see this effect happen often in the public sector is that there are very strict and stringent rules under the civil service regulations that govern the government’s ability to fire or retrench or to compel people to resign.”
Beyond minimum wage increase, FG should consider import duty reduction, tax harmonisation and food subsidisation for low income earners
To forestall the further decline of the economy in the face of an increased minimum wage, analysts and especially members of the organised private sector (OPS) have called for tax waivers, suspension or reduction in import duty charges, harmonisation of the many taxes in the country and subsidisation of food for low-income earners.
Recall that these were some of the recommendations of the Presidential Fiscal Policy and Tax Reforms Committee in May, which made a case for the taxes and levies collected by the three tiers of government to be streamlined and harmonised into eight headings.
Chairman of the committee, Taiwo Oyedele, said the recommendation is to make tax administration modern, simple, adaptive and enable economic growth.
He also said the Federal Government is working towards a system that will exempt 95 percent of businesses in the informal sector that mostly earn N25 million or less yearly from paying all taxes including withholding tax, company income tax and payroll taxes.
Recall also that the Federal Government recently announced a 150-day import duty suspension on staple food as well as dispatched 740 rice trucks to states at 20 trucks for each of the 36 states and the Federal Capital Territory, Abuja.
Among the conditions of OPS’ acceptance of the new minimum wage is that the president fulfils his promises as regards fiscal and monetary policies.
On his part, Effiong said: “In the very short term, we can do things like either reduce or temporarily suspend duties on imports and exports. It incentivises Nigerian companies and producers to produce things for the overseas market, earn in foreign exchange, repatriate it to Nigeria and then they have more naira to invest in their business, to pay salaries, to pay taxes, etc.
“With respect to imports, a temporary suspension or a reduction in the level of import duties can empower importers to at least bring in food. When the food supply is increased and it is predictable and it is not subject to variations and changes, then economic actors, both on the supply-producer side and on the consumer side, can feel confident enough in their ability to get goods. It will reduce the pressure on food prices and food prices will come down.
“Then we can directly subsidise consumption at the lower-income level. The Federal Government has a clear idea of which public sector workers earn the minimum wage within the public sector. Why not have a targeted food welfare scheme that is well designed, that is well run and targets people at that level so that you are directly giving them food or you are directly giving them the resources for them to buy food at a subsidised level so that it curtails the inflationary effect of just increasing, both directly and indirectly, everyone’s salaries.”
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