With the approval of a 67 percent hike in the minimum wage for workers now behind Abuja, focus is shifting to the implication of the increase for the Federal Government and states’ finances.
BusinessDay attempted to glean some insight from the last wage hike, which was in 2011, to see the impact it had on the FG’s wage bill.
In 2011, when a 100 percent minimum wage increase from N9,000 to N18,000 was implemented, personnel costs rose 18.54 percent (N290 billion) to N1.85 trillion, from N1.56 trillion in 2010, according to data obtained from the Central Bank’s 2011 annual report.
On the basis of the 2011 wage hike, a 67 percent increase could add N194 billion to the Federal Government’s wage bill.
That may be a paltry sum for the Federal Government, whose annual revenue has averaged N2 trillion in the past three years. N194 billion is only 9.7 percent of that.
The marginal increase, however, fails to mask what critics say is the bigger problem – an expensive top echelon civil service that is a drag on public revenues.
Personnel costs, at N2.3 trillion, will account for 40 percent of the projected revenue for 2019, according to the Budget Office.
In 2018, the FG’s wage bill was forecast to gulp N2.1 trillion, 60 percent of estimated FG revenue of N3.5 trillion, according to BusinessDay estimates.
In 2017, some 70 percent of FG’s N2.7 trillion revenue went to personnel costs of N1.86 trillion, according to the budget implementation data on the website of the Budget Office.
It is unclear if the minimum wage hike this year was factored into the 2019 budget, which sets aside N 2.29trn for personnel costs, a 9 percent increase from the N2.1 trillion budgeted in 2018.
An email to the Budget Office and Ministry of Finance did not get an immediate response.
The burden of a wage hike on the FG’s already strained finances could be underestimated, according to Andrew Alli, former CEO of the Africa Finance Corporation and now a director at private-equity firm, CDC Group.
“After it (the wage hike exercise) is done, there will be agitation that differentials will need to be maintained, meaning that virtually all government employees will have a pay rise,” Alli said.
“This is part of our habit of not adjusting things continuously, meaning that we then have to adjust through economy-crushing massive hikes (think exchange rates, fuel prices, government salaries), to name but a few,” Alli told Business Day.
Beyond the pressure it piles on public revenues, the implication of a widening wage bill also threatens to leave the government no choice but to borrow just to meet personnel expenses, without adding statutory transfers, overhead costs, debt service and capital expenditure.
For a government that already commits over 60 percent of its revenue to debt servicing, the numbers suggest there is little room for wasteful borrowing that isn’t tied to capital projects, critics say.
The numbers are indeed damning.
The Federal Government spent $3.5 billion or N1.07 trillion paying interest on money borrowed from local and international sources in the first six months of 2018, which implies paying $584 million (N178.7 billion) monthly and $18.8 million (N5.75 billion) daily, according to BusinessDay calculations.
At the current pace, economists warn that debt service costs could be the biggest line item in the budget in another two years, surpassing capital expenditure and non-recurrent expenditure.
While the FG looks set to struggle with the wage hike, cash-strapped states face an even sterner test.
With the implementation of the new minimum wage policy, the personnel cost in no less than eight states will exceed 100 percent of their Internally Generated Revenue (IGR). It means these states could be devoting their entire IGR to the payment of worker salaries alone.
They include Osun, Kebbi, Zamfara, Borno, Adamawa, Taraba, Yobe and Benue States. For all eight, their monthly average personnel costs exceed their IGR.
In addition to the eight states listed, 16 others will see average monthly personnel cost accounting for more than 50 percent of IGR.
This means more than 50 percent of IGR of the affected states will be used to pay salaries.
For the remaining 12 states, personnel costs will remain below 50 percent, with Lagos and Rivers the most comfortable of the pack.
Worried by their strained purses, state governors had objected to a N30,000 minimum wage. Instead, they proposed N22,500.
For corporations and small businesses already operating in a weak economy and a loose labour market with 23 percent unemployment rate, they won’t be able to afford paying wages dictated by legislative rather than market forces and may lay off workers or hire cheaper temporary staff.
That’s especially true for smaller businesses, which don’t have the same access as larger ones do to capital, analysts say.
The implication of a wage hike on the finances of the Federal Government, states and corporations prompted the creation a technical advisory committee headed by renowned economist, Bismarck Rewane.
The committee was charged with the task of recommending ways the government can fund a larger wage bill.
A local newspaper, quoting unknown sources, reported this week that the committee has recommended two quick solutions – a VAT increment and an adjustment in the official exchange rate of the dollar to the naira.
Rewane held back from divulging the recommendations of the committee in an interview with BusinessDay, as he said he was unable to reveal any such details.
Minister for Budget and National Planning, Udoma Udo Udoma, said this week that the Federal Government was considering an upward review of the 5 percent currently charged as Value Added Tax (VAT) by 50 percent to enable it fund the new national minimum wage.
LOLADE AKINMURELE
