28 June 2018 ( Lagos ) : The 2017-2020 Economic Recovery & Growth Plan (ERGP) has run for over a year. Despite some green shoots, sluggish implementation and a lack of clarity concerning funding have taken the sting out of the development plan. The ERGP identified key execution priorities: 

• Stabilize economic environment: There have been notable positives here including exit from recession, declining inflation rate, the enactment of a market-reflective exchange rate window, and an improvement in the external balance. The primary negatives surround fiscal policy. Non-oil revenue growth has been sluggish, underlined by the underwhelming performance of the government’s tax amnesty program despite a 3-month extension. Meanwhile, government spending has remained constrained by delayed budget passage, incomplete capital expenditure disbursements, and a high proportion of spending dedicated to recurrent expenditure (salaries and debt financing). More progress is needed in this area, although analysts are skeptical this would occur during the present fiscal year. 

• Food security: Nigeria continues to make strides in attaining self-sufficiency in select staples, but food security has been threatened by the scourge of violence across the Middle Belt in recent years. 

Analysts note that the President enacted a Food Security Council in March 2018 to address this, and await updates on the committee’s strategy for dealing with the issue. 

• Energy security: Energy security remains a very distant reality for Nigeria as the country remains reliant on imports in the absence of functioning refineries. In fact, the situation has deteriorated in 2018 as higher oil prices increase the subsidy burden on the Nigerian National Petroleum Corporation. Analysts do not expect this dynamic to change until the Dangote refinery comes onstream in 2019/2020. 

 •Transport infrastructure: According to the Ministry of Finance, public investment in roads rose from ?19 billion in 2015 to ?307 billion and ?208 billion in 2016 and 2017, respectively. There have been further successes recorded through the ?100 billion Sukuk issued for road finance, as well as in public-private partnerships (PPP) for rail investment. Analysts expect transport infrastructure to continue to receive significant investment as the Federal Government focuses its spending here and commits to securing additional PPPs in this area. 

• Drive industrialization to support SMEs: The picture here is mixed. Improvements in the ease of doing business have been a minor win and analysts expect the Presidential Enabling Business Environment Council to roll out further action plans in pursuit of a higher ranking on the World Bank Doing Business Rankings. Although there are legitimate concerns that not enough SMEs have felt the effects of the purported improvements, they do not ignore the confidence boost of Nigeria’s rise in the rankings. In contrast, Special Economic Zones (SEZ) – the primary industrialization vehicle chosen by the government – are still a phantom presence in the country, despite the plan to set up a new SEZ in each of the six geopolitical zones. They do not expect much change here as budget and bureaucratic delays would likely prevent any notable progress in new SEZs before the 2019 elections. Given this, Nigeria’s industrial base would remain fragile in the interim. 

ERGP labs: The proof will be in the pudding 

The Federal Government ran focus labs for the ERGP between March 12 and April 22, 2018. The labs were a workshop-style series of meetings between industry stakeholders and the public sector, aimed at identifying projects which would help achieve ERGP targets. The focus labs placed emphasis on projects with high private sector participation and were to devise clear implementation roadmaps. 

At completion, the focus labs had identified 164 projects across three strategic sectors of the economy (agriculture & transport, gas & power, and manufacturing & processing) which would rake in $22.5 billion in investment and create 500,000 jobs. 

Analysts see this as a positive step towards actualizing ERGP recommendations, but are cautious of the ultimate impact as the focus labs would not be directly involved in project execution, with the responsibility falling on the relevant ministries. 

Is now the time for a minimum wage hike? 

Nigeria is finalizing plans to increase its national minimum wage from ?18,000, last amended in 2011 (previous: ?5,500). Whilst the wage amount is yet to be determined, the National Labour Congress (NLC) has reportedly pushed for a wage floor as high as ?66,500. 

Furthermore, the NLC has pushed for a September roll-out of the new wage structure, but are likely to be disappointed on this front. The Minister for Labour & Employment, Senator Chris Ngige confirmed that the Minimum Wage Tripartite Committee would submit its recommendations to the Federal Government by September. 

Following that, the Executive arm of government would pass the recommendations on to the Federal Executive Council and National Economic Council, before a bill is finally transferred to the National Assembly to be enshrined into law. The National Assembly would also need to pass a supplementary budget for the implementation of the wage policy. 

Considering all this, analysts do not see the new minimum wage being rolled out in 2018, in line with the Minister’s guidance that a year-end target would only be achieved if processes are fast-tracked. That said, they anticipate that the current administration would want to milk the goodwill potential of the new minimum wage and foresee increased traction in the run-up to the elections – though they do not expect the policy to be passed by then. 

As previously mentioned, the government would need to pass a supplementary budget in order to fund the resultant increase in recurrent expenditure. In fact, analysts are concerned about funding as the Federal Government (FG) is still struggling to reduce its wage bill while many state governments are still reliant on FG support to pay salaries. 

Moreover, the magnitude of the proposed hike gives pause. Admittedly, the jump may be in line with pricing changes since 2011 – analyst’s estimates suggest that once they account for post-2011 inflation and currency depreciation, ?18,000 would be equivalent to ?63,300 at the end of 2017, only slightly lower than the ?66,500 proposed by the NLC. One way to salvage the fiscal picture would be to allow states to establish different minimum wages above a federal wage floor – a system being effectively used in the United States. 

The proposed minimum wage hike would have myriad effects on the economy. Whilst it should provide a material aggregate demand boost in the short to medium-term, the concern is that this would stoke long-run inflation if aggregate supply does not expand in tandem – a plausible situation given ongoing challenges in Nigeria’s business environment and persistently low productivity. 

Meanwhile, the fiscal angle is unequivocally worrying as many state governments are in precarious fiscal positions, and this is before they account for the opportunity costs of spending more on salaries. Analysts also highlight the usual concerns of higher unemployment on the back of minimum wage hikes, but note that empirical evidence is inconclusive on the matter. 

However, the magnitude of the proposed hike and the fragility of Nigeria’s labour market means that higher unemployment is a fair possibility. Overall, although there is a clear need for a minimum wage increase given the erosion of spending power in recent years, implementation in the near future would have serious implications for Nigeria’s labour market and fiscal stability. 

Source: Analysts at Vetiva Capital Management

Reporting for EasyKobo on Thursday, 28 June 2018, in Lagos, Nigeria.