Nigerian labor is flexing its muscle before an election, winning a large increase in the minimum wage despite investor concerns about the oil-exporting nation’s deteriorating budget balances.
The Nigeria Labour Congress, one of Africa’s biggest unions, called off its threat to hold a nationwide strike from Tuesday after its 4 million members won a 66 percent increase for a new monthly minimum wage of 30,000 naira ($83), spokesman Benson Upah said by phone from Abuja, the capital. President Muhammadu Buhari pledged to send a bill for approval by lawmakers “for passage within the shortest possible time,” his office said in an emailed statement.
“I am fully committed to having a new National Minimum Wage Act in the very near future,” Buhari said.
While there’s justification for the move given the naira has halved in value since the last increase, “it is unclear if the government has the revenues to pay this higher wage,” said Charles Robertson, chief economist at Renaissance Capital in London. “The government already spends too high a percentage of its revenues on recurrent expenditures like wages, and not enough on investment.”
The current minimum wage of 18,000 naira is difficult to live on in a country where inflation is driven by external costs because everything from petroleum to food and pharmaceuticals is imported, according to the unions. Strikes in Nigeria over issues including wages and protests at the prices of gasoline and electricity have virtually shut down the West African nation in the past, and threatened to unseat previous governments.
The move comes before Buhari, 75, seeks re-election in February, and even as the government has warned that it expects to miss revenue targets. On Monday, the eve of the planned strike, vehicles could be seen lining up at filling stations in Abuja in anticipation of disruptions.
Approval of the raise marks “a populist, yet imprudent decision that diffuses working-class rage at the expense of sound economics,” said Cheta Nwanze, head of research at Lagos-based risk advisory SBM Intelligence. “The fundamentals of the economy at this time, given dwindling revenue and the indebtedness of states and their inability to pay their workers the current wage, simply cannot sustain an upward review of the minimum wage.”
Details of the agreement and costs haven’t been announced, but the government already proposed to set aside at least 160 billion naira for wage increases next year. The higher recurrent expenditures will further erode the government’s ability to spend on infrastructure needed to boost growth.
Nigeria is expected to run a fiscal deficit of 3.3 percent of gross domestic product this year, according to the average of 10 economist estimates on Bloomberg before the wage announcement. Inflation was seen at 12 percent, double the lower end of the authorities’ target range of 6 percent to 9 percent.
Investors have been urging the government to rein in spending and stop capping costs of gasoline and other subsidies. Government debt service more than doubled to 1.68 trillion naira in the first half of 2018, which could force Nigeria into more external borrowing, according to a report by Chapel Hill Denham, a Lagos-based investment bank.
The yield on Nigeria’s naira-denominated bond maturing in Feb. 2028 rose to 15.7 percent on Tuesday, the highest since it was issued more than eight months ago, according to data compiled by Bloomberg. The cost for Nigeria to borrow in dollars has also been increasing this year, with yields on its longest-maturity debt at 8.62 percent on Tuesday, compared with 6.88 percent in January.
While most lower-income earners in Nigeria are employed in the informal sector and won’t benefit from the raise, increased price pressures could influence the actions of the central bank, according to Mark Bohlund, who covers Africa for Bloomberg Economics in London. Nigeria’s budget stress will also be compounded by oil prices, which hit their lowest level in seven months on Tuesday.
The central bank’s policy makers are likely to see the wage increase “as a realization of the upside risks to election-related spending that has prompted a number of them to vote for a tightening of monetary policy,” Bohlund said. “It may add some upside pressure on bond yields, but the oil price will remain a stronger factor for the government’s borrowing requirements.”