A New Minimum Wage That Favours Economic Stability

The increase in the cost of living has not only impacted necessities but has also diminished the overall quality of life for Nigerians. With the escalating prices of goods and services, many households are forced to cut back on discretionary spending, which affects their mental and physical well-being. The struggle to make ends meet has become a daily reality for many, prompting a growing demand for wage increments to help offset these rising costs.

In light of these harsh economic conditions, economic experts say the demand for higher wages is a natural response from the working class. “The removal of transportation subsidies, a common tool used by governments to ease financial burdens and promote accessibility to public transport, has further intensified the situation,” said a Benin-based labour activist Uwa Johnson remarked on the ongoing debate for review of the minimum wage. Without such subsidies, the increased transportation costs directly impact workers’ ability to commute affordably, adding to their financial woes. This context of soaring living costs, high inflation, and reduced purchasing power underscores the urgent need for wage adjustments to help Nigerians cope with the ongoing economic challenges.

But the debate is one of just demand versus affordability. Can the governments afford it? Is it sustainable? Would labour accept a cut in jobs? Who pays for the non-viable states?

We cannot pay – govt

President Bola Tinubu has said the federal government cannot pay more than N62,000 minimum wage, a rate the Nigerian Governors Forum and employers in the organized private sector say is too much to shoulder. The president said his team is already finalizing work on an executive bill on the minimum wage that would be sent to the national assembly “to enshrine what has been agreed upon as part of our law for the next five years or less”.

As it stands, about 11 states of the federation are grossly incapacitated to pay the N60,000, while other states have varying levels of incapability. A states’ FAAC net distribution data shows that the 11 states have recurrent expenditures that far outweigh their total revenue. The affected states include; Abia, Ekiti, Gombe, Imo, Katsina, Kogi, Oyo, Plateau, Sokoto, Yobe and Zamfara States all have negative net revenue.

While labour rightly claims that the subsidy removal and exchange rate float have led to the state’s earning an additional revenue of billion from FAAC, the NGF argues that the real value of additional revenues has shrunk due to the surge in inflation, restricting the response options for states to the current socio-economic crisis and emphasizing the delicate balance states must maintain. “It is crucial to recognize State governments’ limitations in addressing today’s socio-economic situation. While the State government can influence fiscal policy, it requires complementarity of fiscal and monetary policies at the federal level to achieve the much-desired results. Any wage increase approach should align minimum wage adjustments with economic realities at the subnational level – Prioritizing the fiscal sustainability of State’s,” the governors said in defence.

Economic experts have warned that wage increases result in higher salaries, wages, allowances, social contributions, and benefits, contributing to the total personnel costs. Personnel costs steadily increased over the five years from 2018 to 2022, rising from approximately 1.4 trillion in 2018 to about 1.8 trillion in 2022. Meanwhile, the total recurrent revenue (FAAC + IGR) averaged around N4.6 trillion within the same period, reaching N6 trillion in 2022.

Most state governments in Nigeria struggle with insufficient revenue generation, which significantly hampers their ability to pay higher minimum wages. The primary sources of state revenue include federal allocations, internally generated revenue (IGR), and loans. However, many states have a limited capacity to generate substantial IGR due to weak economic bases and poor tax collection mechanisms. With the ongoing economic challenges, including rising inflation and reduced federal allocations due to fluctuating oil prices, state governments find it increasingly difficult to meet existing financial obligations, let alone accommodate a higher minimum wage above N60,000.

The high cost of living in Nigeria exacerbates the financial strain on both citizens and government finances. The recent report by SB Morgen (SBM) Intelligence highlighted that the average transportation cost has increased by 77%, and essential commodities like soap and fuel have seen price hikes of over 150%. These increases contribute to the overall inflationary pressure, which reduces the purchasing power of existing wages.

While there is a pressing need to increase workers’ wages to cope with the rising cost of living, state governments argue that they cannot sustainably afford a minimum wage above N60,000 without significant economic restructuring and increased revenue streams.

Budgetary constraints and prioritization

State governments are also constrained by their budgetary allocations and the need to prioritize essential services and infrastructure development. Education, healthcare, and security are critical sectors that require substantial funding. Allocating a significant portion of the budget to wages could lead to a reduction in the quality and availability of these essential services. The Nigerian Governors Forum has emphasized that increasing the minimum wage beyond N60,000 would necessitate drastic cuts in other vital areas, potentially compromising the overall development and welfare of the state populations.

Debt burden and financial obligations

Many Nigerian states are already burdened with significant debt and ongoing financial obligations. The need to service these debts and fulfil other financial commitments, such as pensions and social services, limits the fiscal space available for wage increases. The Nigerian Governors Forum has pointed out that the rising debt levels and the associated interest payments create an untenable situation where increasing the minimum wage to more than N60,000 would exacerbate the states’ financial instability. The focus remains on managing existing debts and ensuring fiscal responsibility to avoid potential defaults.

Economic diversification challenges

The challenge of economic diversification further complicates the ability of state governments to pay higher wages. Many states rely heavily on federal allocations derived from oil revenues, which are subject to global market fluctuations. Efforts to diversify state economies into sectors such as agriculture, tourism, and manufacturing have been slow and face numerous obstacles, including inadequate infrastructure and investment. Until states can successfully diversify their economies and reduce their dependence on oil revenues, their ability to sustainably increase the minimum wage remains limited. The Nigerian Governors Forum has consistently highlighted the need for economic diversification as a long-term solution to financial sustainability, rather than short-term wage increases that could lead to fiscal crises.

The federal government’s decision to eliminate fuel subsidies and implement a managed exchange rate float, which, while aiming to achieve stability and resilience, has inadvertently led to a cost-of-living crisis underpinned by a sustained increase in the general price level of goods and services, resulted in a decrease in the purchasing power and increased poverty levels.

According to a report by SB Morgen (SBM) Intelligence, the average amount spent on transportation by Nigerians has risen by 77 percent within a year. This substantial increase is primarily driven by a staggering over 150 percent rise in fuel prices, which has trickled down to affect various aspects of daily living, placing an immense burden on commuters.

The implications of these rising costs extend far beyond transportation, touching every sector of the Nigerian economy. The SBM report, updated on April 26, 2024, highlights that the prices of essential commodities, including soap and other daily necessities, have also seen significant hikes. From the first quarter of 2023 to the end of the first quarter of 2024, the cost of living has soared, making it increasingly difficult for the average Nigerian to meet basic needs. This escalation in prices not only affects household budgets but also threatens to widen the gap between different socio-economic classes, as those with limited financial resources struggle the most to cope with the higher costs.

The rise in transportation and living expenses is symptomatic of broader economic issues that require urgent policy interventions. The government needs to address the root causes of inflation and take measures to stabilize fuel prices to prevent further economic strain on its citizens. Without such interventions, the increased cost of living will continue to exacerbate poverty levels and social inequality in Nigeria. The ongoing price hikes underscore the critical need for sustainable economic policies that can mitigate the adverse effects of such economic disruptions on the population.