Companies in the private sector may increase salaries in 2024 on the back of rising inflation and the Federal Government’s new wage regime set to be in place in April, analysts at CardinalStone Research say.
In its latest economic outlook report titled ‘Sailing through troubled waters’, the firm said it sees “legroom” for higher wages this year.
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“While higher wages could increase inflationary risk if production does not keep pace, we expect the impact of the high base effects on some inflation buckets to cap the scope for a strong year-on-year increase in the broad CPI reading,” the report said.
It said wages have historically had a weak correlation with inflation (0.28 over the last 12 years), possibly due to Nigeria’s inflation computation methodology. “In any case, we are of the view that higher wages could support recovery in domestic consumption, with a positive passthrough to the economy.”
The report noted that the effects of economic reforms such as subsidy removal, efforts to harmonise exchange rates and others, appear to have driven inflation to a 27-year high and, inadvertently, weakened economic activities in 2023.
BusinessDay reported last month that salaries and wages in Africa’s biggest economy rose to the highest in at least 13 years for the first six months of 2023.
According to the latest Nigerian Gross Domestic Product Report (Expenditure and Income Approach) report by the National Bureau of Statistics (NBS), compensation of employees rose by 17.3 percent to N13.21 trillion in the first six months from N11.26 in the same period of 2022.
Over the past seven months, the Consumer Price Index also known as the inflation rate in Africa’s biggest economy has accelerated to the highest in 18 years largely on the back of the Federal Government reforms such as the removal of petrol subsidy and naira devaluation.
Data from NBS shows that inflation rose to 28.2 percent in November last year from 27.33 percent in October.
Food prices which is a major contributing factor to the surge in the inflation rate, are also at their highest in 18 years. It rose to 32.84 percent in November from 31.52 percent in October.
“The rise in food inflation on a year-on-year basis was caused by increases in prices of bread and cereals, oil and fat, potatoes, yam and other tubers, fish, fruit, meat, vegetables and coffee, tea and cocoa,” the NBS said. Analysts at SBM intelligence said in a recent report that Nigerians spend 97 percent of their monthly income on food.
“Removing subsidies has increased the prices of goods and services such as fuel and food. This has made it difficult for people to afford necessities such as food and transportation,” they said.
“The economic change has also affected people’s ability to earn a living wage. Many people have lost their jobs or experienced decreased income due to the economic downturn,” SBM Intelligence stated.
David Omojomolo, Africa economist at Capital Economics, said, inflationary pressures are set to build from here. “The fuel subsidy’s removal will continue to add to inflation through second-round effects. And the naira’s fall in value against the dollar will continue to push up inflation too.”
A report by KPMG Nigeria recommended that sustainably taming inflation would require not only monetary responses which are generally more apt for addressing demand-pull inflation, but also addressing underlying supply-side problems driving cost-push inflation.
The World Bank’s latest Nigeria Development Update report revealed that rising inflation and sluggish growth in the country increased the number of poor people to 104 million in 2023 from 89.8 million at the start of the year.
Authors of the CardinalStone report noted that on the heels of the policies, domestic consumption (cumulative 60.0 percent of the economy) declined by a cumulative 10.6 percent in 2023, materially weaker than the 2.0 percent and 5.3 percent contractions during the COVID period and 2016 recession, respectively.
“Despite the government’s efforts to alleviate the impacts on the cost and standard of living of the populace, the country’s poverty level worsened in 2023,” it said.
It stated that the sluggish economic growth also became more entrenched due to flat investments and low unemployment, which increased the burden of catering for dependents.
“Elsewhere, material currency devaluation cascaded to FX losses for exposed businesses, higher import duties for companies reliant on imported raw materials, and,
consequently, weaker manufacturing growth.” It added that Nigeria has set an ambitious plan to join the trillion-dollar economies, targeting $1.0 trillion in the next seven years and $3.0 trillion in the next 10 years.
“If the government’s target is achieved, Nigeria could be among the top 25 largest economies globally. In our view, three factors are likely to be pivotal in achieving these targets,” it said. “They include exchange rate level, inflation trajectory, and value creation.”
