Cheta Nwanze, Head of Research, SBM Intelligence
Follow Cheta Nwanze
Subjects of Interest
- Fiscal Policy
- Geopolitical Analysis
The new national minimum wage as a band-aid solution 15 Apr 2019
On Tuesday, 19 March, 2019, Nigeria’s Senate approved ₦30,000 as the new national minimum wage by passing the National Minimum Wage Act (Repeal & Enactment) Bill 2019. The approval followed the submission of a report by the Senate ad-hoc committee on national minimum wage, headed by acting chairman, Senator Francis Alimikhena. The Senate also asked the executive to submit a supplementary budget for the immediate implementation of the new wage increment.
In January, the House of Representatives approved the same amount as the new national minimum wage. The National Assembly has passed the legislation on minimum wage despite protests from state governors who have said they cannot afford ₦30,000 minimum wage. Towards the end of 2018, the governors had proposed a marginal increase from the existing minimum wage of ₦18,000 to ₦22,500. As of the last week of March when this article was submitted for publishing, President Muhammadu Buhari had not assented the bill, although he had endorsed a new minimum wage of ₦30,000 during the campaign season.
One of the things that is as sure as death and taxes is that sooner or later, the labour unions will begin another agitation for increase in the minimum wage for workers. Negotiations between labour unions and the government on minimum wage have followed a similar trend over the years. The government makes a token increase, everyone is happy, and then in a few years, labour unions are back at the negotiating table.
The current national minimum wage of ₦18,000 was calculated based on the cost of living at the time it was approved and implemented in 2011. When it was agreed upon, inflation rate was double digits. However, the inflation pressure was tamed in the years that followed as the economy also improved. Since that time though, Nigeria has suffered a recession and gone back to double digit inflation.
The national poverty line of $1.90 per day was equivalent to ₦313.5 in 2011. It is ₦684 now. With the fallen value of the naira, what this means is that a wage of ₦18,000, or even ₦30,000, is not sufficient to maintain a Nigerian family. The new minimum wage (₦30,000 or $83.3) still hovers around the poverty line.
Inasmuch as higher wages are desirable, there is the challenging issue of how this new minimum wage will be sustainably funded. Several states are still owing their workers backlog of salaries under the current wage structure. This is in spite of the bailout funds many of these states received.
An analysis by BusinessDay Newspaper projected that ₦30,000 minimum wage (a 66 percent rise from the old level) will cost the federal government (FG) alone an additional ₦1.25 trillion annually. The 2019 Appropriation Bill of ₦8.83 trillion is ₦300 billion lower than the ₦9.1 trillion budget for 2018. The government said the proposed spending would further reduce the deficit from ₦1.95 trillion in 2018 to ₦1.6 trillion this year. The new minimum wage upends that plan to reduce the deficit and will plunges the country deeper into the debt conundrum.
With this in mind, some officials flew the kite of an increase in Value Added Tax (VAT) to enable the government raise additional revenue to pay the new minimum wage. This plan was also said to be part of the deal brokered with the Nigerian Governors Forum (NGF) to get the state governors buy-in on the wage increase.
The officials who disclosed the proposal to increase VAT before the end of the year were Minister of Budget and National Planning, Senator Udoma Udo Udoma, and Executive Chairman of the Federal Inland Revenue Service (FIRS), Babatunde Fowler. During a discussion with the Senate Committee on Finance on the Medium Term Expenditure Framework for the 2019 budget, Udoma and Fowler disclosed that the FG was considering an upward review of VAT by as much as 50 percent from the current 5 percent to fund the new minimum wage. The minister told the Senate that the Technical Advisory Committee on minimum wage was expected to submit its report to President Buhari.
Many analysts have opined that a hike in VAT will increase the burden Nigerians are already carrying. Such a high increase in VAT (50 percent) will almost completely wipe off the gains of increased wages for workers.
Another argument is that while the new minimum wage will largely increase the incomes of public sector workers and a few others in the private sector, hiking VAT would inflict a lot of economic hardship on the generality of the people. Since VAT is a form of taxation that is targeted at consumption, there is no way of ameliorating its impact on the people. Critics of this proposal have said that it could be likened to giving with one hand and using the other hand to take it back. They have described the offer to pay the ₦30,000 new minimum wage to workers based on the new template of VAT as amounting to offering Nigerians a “poisoned chalice.”
There is the real possibility that an increase in VAT will drastically reduce the purchasing power of the average Nigerian worker. This might ultimately trigger another round of disenchantment and labour agitation in the country. Ergo, we will be back full circle to another round of government-labour negotiations on minimum wage as I mentioned earlier. It is important to note though, that the government has since walked back the idea of the VAT increment following a public outcry. But the truth is that the issue will not go away.
Be that as it may, wage policy in Nigeria needs to factor the rising income inequality within and between states. In a country like Nigeria – with its wildly varying costs of living – minimum wage should be determined at sub-national levels. Each state should compete for talent and pay what it can afford.
Then there is the funding challenge that the new minimum wage will face. Rather than plunge the country further into debt or impoverish the people with more taxes, this would have been a perfect opportunity to negotiate a removal of petrol subsidies in exchange for the upward revision of the minimum wage. But clearly, the government was unwilling to consider this as a policy option because of the potential political consequences, especially as elections were in view.
There are structural and macroeconomic factors in Nigeria that have to be addressed to provide not just a higher minimum wage that is sustainably paid for but also a living wage for Nigerian workers. Short of tackling those fundamental factors, nominal increase in minimum wage only amounts to fixing a symptom of the problem.