Recently, the FGN approved wage increment for civil servants following stand-offs with the Labour Union. By 2020 budget estimates, this will be funded by tax increments and related revenues. One argument for the wage adjustment, despite the funding burden, is the likely net positive impact on output growth.
By expenditure approach, Consumption accounts for 60% of Nigeria’s GDP, while Government (5.6%), Investment (16%) and Net Exports (19.4%) contribute the balance. So, will the wage increment really bolster GDP growth? First, the net impact of massive fiscal spending on wage increment for civil servants (3.5 million FGN + 36 States & 774 LGAs workers) compared to aggressive consumption tax increases (via VAT, POS, excise duties, toll gates) on c.200millions Nigerians, maybe contractionary on consumption (60% of GDP), which could, in turn, weaken Aggregate Expenditure (AD). Again, at 5.6% of GDP, higher government spending may not be enough to bolster GDP, with 25% expended on debt services relative to 21% on capital spending.
Additionally, while local investments may improve, given the CBN’s recent effort to drive credit growth and lower rates, FDI growth is unlikely in the absence of clarity around the current market outlook. Hence, the investment may stay muted. Also, trade is neither here nor there, considering that exports are hugely oil product-driven amid the OPEC output
cap and border closure. In sum, while recent initiatives may be necessary, it may be negative for consumption, and by implication keep GDP growth subdued.
United Capital Research.
