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Pyrrhic victory of any rise in minimum wage

By Henry Boyo

PRESIDENT Muhammadu Buhari, inaugurated a 30 member tripartite Committee on Monday November 27, 2017, to negotiate a new National minimum wage. The Committee comprises six serving State Governors and other members from both the public and private sectors, as well as leaders of organized labour.

The President conceded, on that occasion, that the current (N18,000) minimum wage had since expired; Buhari, also confirmed that on completion of the Committee’s assignment, an executive bill would be sent to the National Assembly, for “scrutiny, before being passed into law”. Hereafter, the impact of any significant increase in the present minimum wage, on some sectors of the economy will be examined in an interrogative prose, to facilitate a clearer picture of the unfolding dilemma. Please read on:

The present  N18, 000 monthly minimum wage presently buys less than 50% of its 2011 value, so would  N36, 000 restore the purchasing value lost to inflation since then?

Indeed  N18,000 which was well over $100 (over $3/day) in 2011, has since depreciated to $50 or US$1-50/day); so, although  N36,000 may seemingly restore parity to the purchasing value of the 2011 minimum wage,    nonetheless,  N36,000 is way below Labour’s demand for  N56,000. Ultimately, however, the President’s Tripartite Committee might reach a consensus, that is just above  N36,000/month, if Labour refuses to accept anything below this amount.

What would be the impact of  N36,000 minimum wage on workers?

Initially, there would be jubilation, but such celebration may be short-lived, as the sudden increase in nominal salaries, will make more money available and quickly expand consumer demand to drive higher retail prices for most goods and services. Over time, however,    if Naira exchange rate remains under pressure, theN36,000 minimum wage will similarly depreciate, particularly if petrol price, ultimately, becomes market determined (around $1/litre (i.e.  N360/litre), instead of the present below $0-50/litre price, which attracts big time fuel smugglers and huge subsidies to our ECOWAS neighbours). Regrettably, the plight of pensioners may not also be adequately addressed by any increase in minimum wage; consequently inflation ravaged incomes will sadly, further impoverish our elder citizens until death!

How would  N36,000 minimum wage affect government budgets?

Indeed, with the notable exceptions of Lagos and Ogun States, recurrent expenditure, which comprises, mainly salaries and administrative expenses still consume over 70% of annual budgets; regrettably, Federal budgets also have the same expenditure ratio, which invariably leaves less than 30% allocation for socially rewarding investments on more vital capital and social infrastructure. Instructively, a 100% wage increase across board, will expectedly double and raise government’s recurrent expenditure well beyond 70% of the total budget of most states, and federal establishments. Consequently, the resultant ill-advised paltry Capital vote for infrastructure, will become further reduced, and deepen our challenges for improved educational and health institutions, with safer transportation networks, and adequate power infrastructure, which should positively drive Nigeria’s economy towards inclusive prosperity.

Most states presently owe several mnths’ arrears of salaries to their workers, so, how will such states fare with  N36, 000 minimum wage?

Well, statutory allocations with the modest, present, internally generated revenue have never been adequate to successfully run affairs of most states; ultimately, State governments may be compelled to increase their debt burden, in order to fund salaries and other recurrent expenses! Notably, however, it is    socially suicidal to spend funds borrowed with almost 20% interest, on just salaries and other such consumables, which may add only minimal value to improving mass social welfare; besides, the burden of a steady increase in unserviceable accumulated debts, will unfortunately, invariably, cripple succeeding governments and the fate of generations of Nigerians yet unborn. Furthermore, State governments, may also, unwisely become apostles of foreign loan accumulation, in the belief that such loans optically cost less; however, ultimately, if Naira exchange rate suffers further depreciation as it is bound to, it may become very troublesome to service or repay such foreign loans; consequently, further increase in allocations to debt service may become suggestive of irresponsiblegovernance of people and resources.

In view of the modest incomes of states, shouldn’t states determine their own minimum wage in line with their individual capacity?

Yes, this should be the rule in truly Federating states, where State administrations do not depend on a federally controlled central purse for monthly allocations to survive.

Nonetheless, as indicated in President Buhari’s speech, to the wages Committee, “the subject of a national minimum wage for the federation is within the Exclusive Legislative list of the 1999 constitution of the Federal Republic of Nigeria (amended). 

What would be the impact of N36, 000 minimum wage on the Private Sector?

Well organized private sector companies, probably pay already around N30,000 minimum wage; consequently, N36,000 will cause additional irritation to the existing burden of high cost of borrowing and the expensive self provision of power, in a market which has become plagued by weak consumer demand caused by double digit inflation rates for several years. Notably, however, the wage structure in the informal, small and micro enterprises subsector is seemingly more flexible and may not respond positively to any law which increases minimum wage to  N36, 000. Ultimately, the net effect of  N36,000 minimum wage will be spiraling inflation, which will still regrettably, significantly erode consumer spending, and discourage expansion in industrial production to ultimately fuel an already combustible unemployment rate, with unsavory social and economic consequences nationwide.

So if increasing the minimum wage is so fraught with danger, how do you then improve real wages and spur consumer demand?

Well, the taming of inflation below 3% from the present over 15% (December 2017) rate will achieve the same object of increasing purchasing power across all sectors; furthermore, since inflation invariably drives interest rates, the cost of borrowing will fall below 10% across board to provide a heavy dose of economic respite nationwide.

How can inflation be brought down below 3%?

CBN does not deny that the high inflation rate is driven by persistent excess money supply in the system. Consequently, the identification of the source and elimination or reduction of surplus money supply, will ultimately tame inflation to best practice levels below 3% and induce single-digit interest rates to businesses. Instructively, the scourge of systemic excess Naira supply will be significantly reduced when CBN stops substituting Naira allocations for Dollar denominated government revenue.

The above article was first published in December 2017.

POSTSCRIPT OCTOBER 2018:  Regrettably, even with higher crude prices approaching $90/barrel, i.e. well above budget benchmark of $50/barrel, the resultant Naira liquidity challenge, will further fuel inflation and sustain higher cost of borrowing to further compound unemployment and our fiscal and monetary woes. Notably, nonetheless, the 2018 budget contains no provision for increase in minimum wage.

 


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