Minimum Wage: States may possibly sack 600000 employees

Spend 130% of yearly IGRs on wage bills
Kano, Imo, others spend about 40% of total revenue on personnel

Govs need to create revenue-generating activities to prevent crisis, says Owoh
Worry over undocumented borrowings as domestic debts fall by 32% in three months

An increasing number of states are falling deeper into the historical cesspit of fiscal crisis with Kano, Imo, Adamawa, and Taraba state governments funding personnel costs with about 40 per cent of their retained revenue last year.

While the fiscal sustainability crisis has reached a worrisome level in some states, many states are affected to a significant degree, spending most of the internally generated revenue (IGRs) to pay salaries, gratuities and allowances.

Last year, the wage bills of the 36 states were 108 per cent of their IGRs, revalidating the claim that only a few states can pay without the monthly Federal Account Allocation Committee (FAAC) receipts.

According to data obtained from BudgIt, a fiscal sustainability advocacy organisation, states incurred a total of N1.94 trillion on personnel costs last year alone, the figure is 108 per cent of the total N1.8 trillion the states realised from IGRs in 2022, the most recent data available at press time.

The cost is almost 130 per cent of the average yearly IGRs of the states from 2018 to 2022, which was N1.49 trillion.

That period could be described as the golden era of the state IGR performance. But the anaemic growth trend in the period raises doubt about the consistency of the expansion seen in the period.

For instance, the figure grew from N1.1 trillion to N1.56 trillion in 2019 only to cave in by nearly N350 billion as it slid to N1.21 trillion in the COVID-19 year. But the crisis of consistent growth of Nigeria’s revenue profile as demonstrated by the states goes beyond the systemic disruption caused by COVID-19.

Recent history is replete with a rise and fall in revenue performance at both the state and federal levels.

In the past five years, for instance, the states have not improved significantly in their IGR performance, especially in real terms. Data suggest that most states’ revenue targets underperform their performance by as much 40 per cent, a trend that has kneecapped the spending power of the subnational unities and made debt funding almost unavoidable.

Last year’s state budget estimates put the composite independent revenue target at N2.64 trillion with Lagos State looking to break the N1 trillion for the first time. The scanty performance data point to a huge underperformance. Lagos State, for instance, has exceeded previous records. Yet, its first half (H1) record points to N800 billion annualised mark.

Many states, even those managed by renowned businessmen, fell far below their self-set targets. For one, Abia State, in its 2023 budget performance, reported N33 billion in revenue, which was 33.3 per cent of its target (N86.4 billion). The state is managed by a former bank managing director, Alex Otti, who many hold in high regard as one of the new breed politicians.

Abia and Lagos are not isolated cases but show typical trends across states. In some cases, revenue performances are 80 per cent below working targets, forcing the majority to live on federation accounts, which accounted for 50 per cent of their retained revenue last year.

In the most recent BudgIt report, only 14 states score 30 per cent and above on the sustainability index.

In the last decade, they have not recorded much progression in actual IGR performances. For instance, since 2019, the sub-national IGRs only grew by 15 per cent in nominal terms – from N1.56 trillion to N1.8 trillion. When discounted for inflation growth and naira depreciation, the real growth of the earnings is in negative territory.

Implementation of the much-expected new minimum wage could force the states to reduce the sizes of their payroll by as much as 50 per cent or worsen the payment default level. A BudgIt survey puts the total number of direct employees in 35 states at 1.176 million as of 2021.

Taraba is not captured in the data published by BudgIt, but an independent finding by The Guardian puts the figure of Taraba public servants at about 23,000. Assuming the average number of the estimated 35 states (33,595) for Taraba, the total number of employees of state bureaucracies could be roughly pegged at 1.2 million.

There are no current data on the subject, but informed observers said the up-to-date figure would be too far from what it was three years ago. A 50 per cent slash in the number owing to the inability to pay could throw as many as 600 million into the labour market and compounds the unemployed level, which was estimated at nearly 40 per cent by the KPMG and the Nigeria Economic Summit Group (NESG) until the National Bureau of Statistics (NBS) introduced a tensely contested methodology that cut the number to five per cent.

Even a 20 per cent cut in the payroll would increase the number of unemployed Nigerians, most of who are breadwinners of their families, by 240,000. But some analysts said the state governors, for political reasons, might retain the number of public employees. That may increase the level of indebtedness at the state level, a situation that would have similar impacts with retrenchment – chief of which is an increase in poverty level.

Already, state governors have dismissed as unrealistic the N62,000 wage floor offered by the Federal Government and the private sector while they came up with their proposals, some of which are a far cry from the demands of the organised labour.

The 36 states have offered an average of N52,000, according to the collation of what the governors considered as an affordable wage floor. At N30,000, Zamfara state offers the least while Rivers state’s N80,000 is the highest.

While the minimum wage discussion is at abeyance, The Guardian reported that President Bola Tinubu would likely settle for between N69,000 and N72,000. Sources from state bureaucrats told The Guardian that the President is not likely going to drift too far from the N70,000 mark.

Apart from the consideration of the sustainability factor, the Federal Government is said to have also come under external pressure – from members of the international financial community and development partners who think that more-than-reasonable top-up in the current wage level would be self-defeating considering the current inflationary level.

Domestic economists have also warned that an unreasonably high wage floor is an invitation to uncontrollably high inflation. An economist, Prof. Femi Saibu said the economy would suffer price shock in two ways – one from higher wage cost and mostly likely higher cost of borrowing that would follow.

A demand-pull inflation would embolden the Central Bank of Nigeria (CBN) to continue its monetary tightening regime, which will feed into the commercial interest rate, which is already way above 30 per cent.

Labour could heed the current warning, abandon the money illusion syndrome and accept the N62,000 offered by employment providers. But that may not stop some states from falling off the fiscal cliff if there are no salary bailouts like the one granted by the CBN a few years ago.

Godwin Owoh, a professor of applied economics and debt management expert, said the governors would need to do away with the notion that “states cannot business” and get involved in revenue-making activities to save their state from insolvency.

“States cannot sit on huge resources as claimed that government has no business in being in business. That is a lame excuse, we must stop. Most states are not viable because the only the majority of governors know how to do is to fly to Abuja to collect allocation. We must begin to interrogate the governors’ entrepreneurial skills when they offer themselves for election. Interestingly, some of them are doing well in their private businesses,” Owoh suggested.

Amid falling or stagnating revenue, governors continue to indulge their states in debt. Though the domestic debt components of the state dropped significantly in the first quarter, from N5.86 trillion to N4 trillion in three months, those familiar with the financial activities said the big elephant is in the components of debt not filed with the Debt Management Office (DMO). These include unpaid salaries, contracts, ‘backdoor’ borrowings from commercial banks and other contingencies that have become a drain on state purses.