Nigerians are currently facing an unprecedented and alarming rise in the prices of goods and services.
This inflation began in 2022 due to global supply chain issues, the impact of the Russia-Ukraine conflict, and widespread insecurity within Nigeria.
The situation worsened following the removal of the fuel subsidy on May 29, 2023, which caused a 223% increase in petrol prices. Additionally, the Naira was devalued to N1,500/$ due to foreign exchange market reforms introduced by the Central Bank of Nigeria (CBN).
As a result, prices of essential food items and transportation more than doubled between May 2023 and May 2024, according to the National Bureau of Statistics (NBS).
Reflecting this trend, the annual inflation rate soared to 33.95% in May 2024, the highest in 28 years. Food inflation also increased sharply, rising to 40.66% in May 2024 from 23.65% in May 2023.
Declining Purchasing Power
Consequently, the purchasing power of the naira has significantly decreased. For instance, according to the NBS Food Price Watch report, the amount of yam tubers that N5,000 could buy dropped from eleven in May 2023 to four in May 2024. Similarly, the quantity of imported rice (1kg) that N5,000 could purchase fell from 6.3 in May 2023 to 2.5 in May 2024.
This trend is evident across various goods and services, indicating a declining standard of living for many Nigerians, particularly those reliant on a single income source, such as a monthly wage.
In response, labor unions, led by the Nigerian Labour Congress (NLC) and the Trade Union Congress (TUC), have called for an increase in the minimum wage from N30,000 to mitigate the impact of rising inflation on workers’ living standards.
Highlighting the need for a wage increase, NLC President, Comrade Joe Ajaero, noted at the 8th Vanguard Economic Discourse that the cost of living index should determine wages. He pointed out that essential items such as a bag of rice, now costing about N84,000, and refilling a gas cylinder, costing between N16,000 and N17,000, illustrate the financial burden on families. Ajaero emphasized that a family of six would need about N270,000 per month to cover basic expenses without meat.
While the labor union’s demand is justified given the sharp rise in inflation and declining purchasing power, the National Minimum Wage Act of 2019 mandates periodic reviews of the minimum wage every five years, making this the appropriate time for an increase.
Historical Lessons
However, experts urge caution, highlighting the potential macroeconomic challenges, such as inflation and unemployment, that could arise from a wage increase. They reference the 1975-76 Udoji Panel salary increase, which led to significant price hikes and prolonged inflation.
Dele Sobowale, a Vanguard columnist, recalled that after the Udoji awards, prices of goods surged, and inflation remained high for several years, eventually leading to a recession by 1984-85.
Private Sector Impact
Experts also stress the negative impact of inflation on businesses, citing N266 billion losses recorded by 15 top manufacturing firms in 2023 due to declining sales, unsold goods, and rising costs of raw materials driven by naira devaluation and inflation.
Eminent economist Bismarck Rewane emphasized the need to consider the private sector’s ability to pay higher wages. He noted that companies, struggling with reduced revenues and high borrowing costs, face challenges in meeting increased wage demands.
State Revenue and Inflation
The financial capability of state and local governments is another concern, given the impact of inflation on their revenues. While the removal of fuel subsidies and naira depreciation increased nominal FAAC revenues, the real value of these revenues was diminished by rising inflation. As a result, the additional revenues generated were not sufficient to offset the inflationary pressures.
Furthermore, the financial statements of state governments reveal that many have not implemented the 2019 minimum wage due to constrained fiscal space. A significant revenue shock or rise in personnel costs could exacerbate financial challenges for state governments.
Wage increases contribute to higher salaries, wages, allowances, social contributions, and benefits, which have steadily risen over the years. However, many states face fiscal constraints, making it difficult to implement further wage increases without jeopardizing their financial stability.
Given these complexities, any wage increase should consider the economic realities at the state level and prioritize fiscal sustainability. Complementary fiscal and monetary policies at the federal level are necessary to achieve desired economic outcomes.
