The plan by the Federal Government to finance the increase in the wage burden through a hike in consumption tax would lead to affected companies shifting burden to the final consumers in form of price increases.
Analysts have suggested that the proposed hike in Value Added Tax (VAT) would dampen consumer spending in a country where 87 million people are living below $1.93 a day while unemployment rate is at an all-time high of 23.80 percent.
The Federal Government, in collaboration with the Federal Inland Revenue Service (FIRS), is planning to raise funds to finance the additional wage burden by raising consumption tax (VAT) to 6.75 percent from the current 5 percent.
Johnson Chukwu, managing director and CEO of Cowry Asset Management Ltd, has said that the new policy could lead to depression in the rate of economic growth.
The economic stimulus of effect of an increase in wages will be largely offset by increase in general price level as a result of rising inflation, according to Johnson Chukwu.
Inflation rate for the month of January now stands at 11.38 percent, but the figure is higher than the CBN’s range of 6 percent and 9 percent.
While the country’s GDP expanded to 2.38 percent in the fourth quarter of 2018, the figure is lower than the 8.2 percent average growth rate between 1999 and 2014.
Analysts at CSL Stock Brokers Ltd said the proposed tax policies also serve as a downside for foreign investments in the Nigerian industrial and business space as well as growth of SMEs.
“In effect, we see this as a fiscal policy designed to rob Peter to pay Paul. We also expect companies who may not be able to raise prices to lay-off workers in bid to manage costs which would significantly impact unemployment,” said the analysts.
Fast Moving Consumer Goods firms could be the hardest hit because they had increased the price of key products in 2016 in order to fend off the effects of rising inflation and high cost of production brought on by a precipitous drop in crude oil price that tipped the country into its first recession in 25 years.
Data gathered by BusinessDay show the cumulative revenue of 13 largest consumer goods firms quoted on the floor of the Nigerian Stock Exchange dipped by 8.53 percent to N1.04 trillion as at September 2018 while combined net income reduced by 20.20 percent to N85.23 billion in the period under review.
“It may be that some companies will try to absorb the increment so that it does not undermine their volumes but in so doing it may impact margins,” said Ifedayo Olowoporoku, consumer goods research analyst, Vetiva Management Ltd.
“The new fiscal policy begs the efficacy of trying to support the economy through a minimum wage increase because many will see prices go up,” said Olowoporoku.
After months of tussle between Federal Government and the Nigerian Labour Congress (LNC), the Senate has approved N30,000 as the minimum wage for federal and state workers.
The country’s workers currently earn one of the lowest pays in sub-Saharan Africa (SSA) at N18,000 (or $50), but the amount is higher than some countries plagued by crisis – Uganda ($6/month), Malawi ($49/month) and Burundi ($7/month).
Perhaps more worrisome is that some states are not viable enough to pay the new wage because their internally generated revenue is abysmally poor.
Countries with higher consumption tax rates mostly have a higher GDP per capita compared to Nigeria’s $1,994.
South Africa’s GDP capita is $6,179 while VAT rate is 15 percent; Gabon’s GDP per capita is $7,373 while VAT rate is 18 percent, and Angola’s GDP per capita $4,465 and VAT rate 10 percent).
Experts say they would have the Federal Government to remove subsidy on petroleum products to fund workers wage bill and fix infrastructure than to increase consumption tax that could undermine economic growth.
BALA AUGIE
