After over a year of negotiations, labour unions, the Federal Government and States appear to have come to an agreement to adjust the minimum wage to N30,000/month. This represents an increase of 66.7% over the current minimum wage of N18,000/month. Local media reports state that the proposed wage is yet to receive final approval from President Buhari, but we expect the President to approve it given that the FG and state governments led the negotiations. While there is no official timeline for implementation, we suspect that States and the FG would reflect this increase starting from the 2019 budget.
Where will the funding come from?
Our main worry is about the weak capacity of governments to pay for the wage increase. Since the collapse of oil prices in mid-2014, government revenues have fallen significantly, with many States having a backlog of salary arrears. Although a strong improvement in revenues was recorded in 2017 and expected in 2018, government revenues are still too weak to cover the elevated cost profile of States and the FG.
For instance, based on the fiscal condition of states as at 2017, only 16 states earned enough revenues to pay for their recurrent expenditure, much less funding social services and infrastructure. Even more discomforting is the fact that only three states (Lagos, Ogun and Kwara) collected sufficient Internally Generated Revenue (IGR) to fund payroll. We use IGR because it is more appropriate in capturing sustainable revenues while payroll is a better gauge of government’s obligations as it is much easier to cut overhead costs. The FG’s finances have also not fared considerably better than States. Between 2016 and 2017, FG’s recurrent expenditure consistently surpassed total revenue. In 2016, FG’s recurrent expenditure was N3.9tn while revenue was slightly lower at N2.9tn. In 2017, this gap widened as the FG’s recurrent expenditure settled at N4.6tn relative to total revenue of N2.7tn.
The implication of the observations above is that governments will struggle to pay for the new minimum wage increase. This is especially true as such a sharp increase in wage will have a ripple effect on salary scales and prompt a strong increase in total payroll costs. While the FG can approach the debt market to meet its obligations, the majority of States are constrained to do this given outstanding loan obligations.
Our expectations: Implementation Likely to Suffer
We believe implementation of the minimum wage will suffer across States, although the FG should be able to fully fund its own obligation. In the private sector, we also expect implementation to suffer considering the fragile state of the economy. Indeed, there is no urgency for private employers in the informal sector to boost wages given surplus labour. Thus, we do not expect the wage increase to have a strong pass-through to inflation.
However, there are a number of options available to FG and States to assuage the impact of the wage increase. First, the increase can be fully implemented for those at lower cadres while a marginal increase or a wage freeze can be considered for those at the top cadres. This means that there would only be a modest increase in the overall wage bill. Secondly, the FG and States can remove subsidies on petrol to increase FAAC allocations. Lastly, and also related to the previous option, the CBN can align its exchange rates to market at N360/US$1 to boost government revenues from oil exports. We estimate that over N1.6tn in revenues can be collected due to the last two options alone. Ultimately, we believe only a better grip on running costs and increased collection of revenues will lead to a sustainable fiscal position for governments.