Over 87 million Nigerians live in extreme poverty on less than the equivalent of two dollars a day. Following months of political bickering and threats of strike action by Labour unions, the Nigerian government announced a new monthly minimum wage raise of approximately 66.67 percent from 18,000 Naira (50USD) to 30,000 Naira (83USD). Despite the increase in minimum wage, Nigeria remains the lowest paying country among the emerging economies using the case of the BRICS (Brazil, Russia, India, China, South Africa). It is important to note that the values used for the BRICS economies were mostly 2018 estimates as against the 2019 estimates used for Nigeria. The value of 18,000 Naira in 2011 was (120USD) when it was enacted and as such there is a significant difference of about 37 USD in the actual value of the increase. Despite this difference, the government has been struggling with implementing this new wage, which at the least could stimulate aggregate demand and ultimately growth.
Source: Several Sources
Perhaps, this confirms the relationship between productivity and wage. While Brazil is also a significant player in the oil market, the over 10 billion USD generated from its oil export between January and June of 2018, only accounted for less than 9 percent of the country total export within the same period. In the case of Russia and Nigeria oil exports accounts for approximately 60 per cent and 90 percent of export earnings and 30: 10 percent of GDP respectively.
In the case of Nigeria, service sector accounts for about half of the GDP and industrial productivity accounts for about a quarter. Furthermore, a large infrastructure gap, low revenue mobilization, and continued reliance on volatile oil production and prices have continued to impede the ability of the country to fast track growth and development. In a bid to mitigate the situation, the government has funded its expenditure through alternative means such as borrowing. While debt to GDP is below most globally acceptable thresholds at approximately 19.3 percent, debt servicing currently costs approximately 31 percent of projected revenue for 2019 and about 54 percent of actual revenue recorded in 2018. With oil still accounting for more than half of the total government revenue and considering the continued volatility in the crude market as well as other exogeneities involved, there is a need to shove up government non-oil revenue.
Source: Central Bank of Nigeria Report 2019
The government announced a 50 percent increase in VAT to 7.5 percent from 5 percent to help boost the non-oil revenue and help the government meet its obligations and finance development. If this scales through, the increment will imply an additional approximately 550 billion Naira revenue annually to the government. At the current 5 percent rate, Nigeria’s VAT collection in 2018 totalled 1.1 trillion Naira accounting for 0.9 percent of GDP compared to about 3.8 percent for most commonwealth and ECOWAS countries.
The government has also mandated the tax collecting authorities to increase its contribution to revenue. Despite this effort the tax to GDP ratio has continued to hover around 6 percent, making it the lowest among the emerging economies using the combination of BRICS, MINT (Mexico, Indonesia, Nigeria and Turkey) and Ghana.
Source: World Bank Development Indicators 2019
Certainly, Nigeria needs to diversify its revenue base. While, additional VAT revenue will help in paying salaries, reduce budget deficits, reduce government debt and fund infrastructure and social services especially at sub national levels with the current ratio of 50: 35:15 to states, local and federal government respectively, however, this must be done in a manner that is considerate to the plight of citizens. A recent online survey revealed that Nigerians spend more than 150 percent of the minimum wage on food.
Source: Picodi Online survey
Implications of the recent announcement of an increase in the minimum wage would imply an almost inevitable inflationary tendency for prices of basic consumption through the mechanism of announcement effect, following antecedents of the Nigerian consumer market and announcement of increase in minimum wage. Inflation rose from 11.25 percent in March when the discussion of implementation of the new minimum wage gained momentum and climaxed at 11.40 percent in May 2019. The new introduction of about 44 percent increase in VAT would therefore be detrimental to the Nigerian workers, as the gains from the increment would have already been eroded and probably leaving them worse off.
While increasing government revenue to meet wage obligations and provide more resources for infrastructure and social services is a great idea, however, there is a need for caution to avoid worsening the plight of the already poor Nigerians. Certainly some Nigerians can afford a VAT increase, however, about half of the population living below than 2 dollars a day cannot. This therefore requires that government ensures it introduces some counter palliative measures to insulate the most vulnerable in the society.