Inflation and debt … Aftermath of the last minimum wage increment

The recent nation-wide industrial action in Nigeria brings back memories of the last minimum wage increment. And what history tells us is clear: though intended to alleviate the financial burden on the working class, it had a complex aftermath that raises questions about its effectiveness and the broader economic effects.

Before embarking on strike in early June, the Nigerian Labour Congress (NLC) and the Trade Union Congress (TUC) had proposed ₦615,500 and ₦494,000 as the new national minimum wage, citing inflation and the prevailing economic hardship. When the government showed indifference and proposed N60,000 instead, the union ordered its members to boycott work from Monday, 3rd of June, marking the beginning of the industrial strike.

A trip down memory lane reveals Nigeria’s minimum wage changed three times from 1981 to 2019. It was increased to ₦5,500 in 2000 and to ₦18,000 in 2011. In 2019, the government reviewed the minimum wage, with workers demanding ₦30,000.

The last increment in 2019 and the current minimum wage was hailed as a victory for workers, raising the wage to a record high of ₦30,000. This analysis shows that in a fight between the labour association and the federal government on minimum wages, the labour group always wins.

However, the increase did not occur in isolation. To fund this wage increment, the government needed significant adjustments to its revenue generation and budget allocations to meet up with the new reality. But as expected, this soon resulted in unintended and far-reaching implications for the economy.

One of the most notable responses was the increase in Value Added Tax (VAT) from 5 percent to 7.5 percent. The move, justified by the federal government to generate additional revenue, inadvertently placed a heavy financial burden on the average Nigerian. VAT is a consumption tax, meaning that it affects everyone and everything, most especially the low-income groups who spend a high proportion of their income on essential goods and services. The analysis is simple: when the government increased the VAT, inflation ballooned and the people needed more money for few goods.

In the long run, the increment in minimum wage could not smother the ember of hardship, as the former was later cancelled by the high prices.

Also, when the government required more money to pay its workers, it increased the national budget. But the government, like other institutions, is not a river of cash; thus, in need of more naira to cover the costs. So, it borrowed more money and increased the country’s debt profile in the process.

This forced the government to spend more money than it had; so it borrowed extra funds to cover the shortfall. As it stands now, Nigeria’s debt profile has become increasingly worrisome, with a growing portion of the budget dedicated to debt servicing. At the end of 2023, each Nigerian already owed N405,000. This scenario raises concerns about the sustainability of such financial manoeuvres, especially when they are accompanied by robust economic decline.