The recent increase in Nigeria’s minimum wage has sparked discussions on its potential impact on alleviating the country’s current economic hardship, with the World Bank cautioning that the wage hike will only benefit a limited segment of the population.

During the launch of the Nigeria Development Update (NDU) report in Abuja, Alex Sienaert, the World Bank’s lead economist for Nigeria, highlighted that while the increase is significant, it will primarily benefit formal wage earners, impacting only about 4.1% of working-age Nigerians.

The new N70,000 monthly minimum wage adjustment, which aims to improve the livelihoods of Nigeria’s workforce, faces significant limitations in its reach and impact – and has been deemed insufficient.

According to Sienaert, the direct benefits will be minimal as the policy mainly targets formal sector workers who are already in the minority. This concern is compounded by Nigeria’s labor market structure, where the majority of workers are engaged in informal or self-employed jobs that are not directly affected by wage legislation.

Elaborating on these limitations, the World Bank’s report pointed out that policies like minimum wage hikes and public sector wage reforms tend to bypass the poorest workers. It states, “Policy initiatives that cover only highly-formalized wage jobs – including policies focused on public sector workers and minimum wage legislation – may not reach many of Nigeria’s poorest workers directly.”

It added that given that formal wage jobs are scarce, especially among poorer households, the direct effects of such policies on poverty reduction are restricted.

Nigeria’s labor market is characterized by a high rate of informal employment, which poses a challenge to wage policy effectiveness. Recent data from the National Bureau of Statistics (NBS) revealed that 92.7% of Nigeria’s employed population is engaged in informal work, underscoring the economy’s heavy reliance on unstructured job roles.

Dr. Tope Fasua, Special Adviser to the President on Economic Affairs, corroborated these findings, noting that only about 7-8% of the working population is under wage employment controlled by the National Labour Congress (NLC).

The NDU report further stated that public sector wage jobs not only account for a small fraction of employment opportunities but are also predominantly occupied by relatively well-off Nigerians. These positions offer higher pay compared to private sector jobs, even when accounting for individual qualifications.

This disparity suggests that public sector jobs are difficult to access for the economically disadvantaged, creating barriers that perpetuate income inequality.

A critical issue highlighted in the report is the enforcement of minimum wage legislation. Even among wage earners in the private sector, compliance with the official minimum wage is inconsistent.

Approximately one-third of private sector employees reportedly earn less than the minimum wage, indicating that the policy’s effectiveness is hindered by imperfect enforcement mechanisms. This gap in enforcement limits the policy’s ability to uplift the poorest workers who may not hold formal wage jobs or benefit from minimum wage protections.

Furthermore, the World Bank cautioned that increasing wages, particularly in the public sector, could place additional strain on Nigeria’s already stretched public finances.

The country has faced fiscal challenges due to high debt servicing costs and dwindling revenue, making it crucial for policymakers to consider the financial sustainability of wage increases. Sienaert emphasized the need for broader employment policies to effectively reduce poverty, as simply increasing wages for a select group will not address the underlying structural issues in the labor market.

The Need for Productive Job Creation

The World Bank’s report calls for a shift in focus from merely expanding employment to creating more productive jobs that provide sustainable livelihoods. It points out that employment alone does not guarantee an escape from poverty, as many jobs, particularly in the informal sector, are not productive or remunerative enough to lift individuals above the poverty line.

The report states, “Many jobs are not productive and therefore remunerative enough to afford a life beyond poverty.”

According to recent labor market statistics, 84% of Nigeria’s working-class population was self-employed as of the first quarter of 2024, representing a decline from 87.3% in the third quarter of 2023. While this shift indicates a slight reduction in self-employment, it also denotes that the vast majority of workers remain outside formal wage employment. The implications of this trend are significant, as the predominance of self-employment often underlines the scarcity of structured job opportunities and can be associated with lower income levels and job insecurity.

This situation underscores the World Bank’s concern that policies focused on formal wage earners are unlikely to have a widespread impact on poverty reduction. With a significant portion of the population working in the informal sector, many Nigerians remain vulnerable to economic shocks and unable to access the benefits associated with formal employment, such as social security, health insurance, and other labor protections.

An African Development Bank (AfDB) report echoes the World Bank’s findings, noting that about 34.3% of Nigerian workers aged 15 and older live below the poverty line despite being employed. This “working poor” phenomenon is largely attributed to low-skilled and low-wage jobs that fail to provide adequate income for a decent standard of living.

The Nigeria Country Diagnostic Note (CDN) 2023 further highlights that many workers are trapped in poverty due to the nature of their employment, which often lacks productivity and offers limited opportunities for upward mobility.

The data paints a stark picture of the labor market’s structural deficiencies, indicating that even significant wage hikes will have limited impact unless accompanied by comprehensive labor market reforms. Experts have advised that the reforms should aim to improve skill acquisition, facilitate access to higher-paying jobs, and foster sectors with the potential to absorb large numbers of workers into productive roles.

The World Bank has called on Nigeria’s federal government to lift its import restrictions on food and fertilizer and adopt a unified tariff structure in line with the Economic Community of West African States (ECOWAS) Common External Tariff.

In its latest Nigeria Development Update (NDU), the international financial institution recognized recent reforms in the country, particularly in the energy and foreign exchange markets, while advocating for additional measures to accelerate economic growth and stability.

The recommendations from the World Bank represent a push towards more open trade policies, which it believes could help alleviate some of Nigeria’s economic challenges, including inflation and foreign exchange shortages.

The World Bank praised Nigeria’s recent moves to improve economic policy, including the removal of the foreign exchange ban on 43 items and the re-launch of the single window trade portal. These measures, according to the bank, are significant first steps toward easing trade restrictions and opening up the economy to global markets. However, it noted that more comprehensive actions are needed to sustain the momentum and further integrate Nigeria into the global trade system.

Specifically, the bank advised that Nigeria should take additional steps to eliminate import bans on various products, such as food, cleaning supplies, apparel, and fertilizers. It also urged the government to align its tariffs with those set by ECOWAS, which would facilitate regional trade and contribute to economic integration within West Africa.

Furthermore, the World Bank emphasized the need for Nigeria to improve tariff transparency and reduce non-tariff barriers in the long term. To achieve this, it suggested that the government streamline trade facilitation processes through better risk management and auditing procedures. These steps are expected to simplify the import and export processes, making it easier for businesses to engage in trade and reducing the costs associated with importing essential goods. Such improvements could enhance the efficiency of Nigeria’s trade sector, thus contributing to economic growth.

The World Bank also provided guidance on how the Central Bank of Nigeria (CBN) can further strengthen the official foreign exchange market. It recommended that the CBN continue its efforts to deepen the market by facilitating formal remittance inflows and allowing international oil companies to channel their foreign exchange sales entirely through the official market.

Additionally, the bank suggested that the CBN restore access to bureaux de change, which had been restricted in recent years, and avoid conducting ad-hoc foreign exchange interventions. It indicated that by providing market participants with greater flexibility in trading foreign exchange, the CBN could enhance the depth and resilience of the FX market, making it more responsive to economic changes.

The context of existing trade restrictions in Nigeria dates back to policies implemented about a decade ago, which have significantly impacted various sectors. In 2015, the Central Bank of Nigeria, under the leadership of Godwin Emefiele, imposed a ban on accessing foreign exchange for 43 items, including rice, textiles, and certain food products, as part of an effort to boost local production and reduce dependency on imports.

While this policy was intended to encourage domestic industries, it faced criticism for driving up inflation and increasing the cost of living for Nigerians. The foreign exchange restrictions made it difficult for businesses to import raw materials and essential goods, leading to supply chain disruptions and contributing to the country’s persistent inflationary pressures. The CBN disclosed that Nigeria lost approximately $1.4 billion between 2015 and 2019 due to the forex restrictions on these 43 items.

In a significant policy shift in October, the CBN lifted the foreign exchange restriction on the 43 items. The move was widely seen as a step toward aligning Nigeria’s trade policies with global best practices, yet uncertainties remain as some of the items continue to be listed on the customs ban, leaving businesses and importers unsure of whether they now qualify for official foreign exchange funding.

The removal of these restrictions was complemented by other measures aimed at stabilizing the economy, including the re-launch of the single window trade portal and the temporary suspension of import duties on certain essential food items. However, the World Bank has highlighted that these initial reforms, while positive, must be followed by broader policy adjustments to truly transform the economy.

In July, the federal government took another significant step by announcing the suspension of import duties on a range of essential food items such as maize, millet, rice, wheat, beans, and grain sorghum. This decision was part of a broader strategy to mitigate the impact of rising food prices and curb inflation, which had reached record levels.

However, as the policy was expected to kick off in August, the Nigeria Customs Service (NCS) clarified that the zero-percent duty policy would apply to companies that meet specific eligibility criteria, including those with established local production capacity. Importers were required to demonstrate that they had verifiable backward integration programs or significant investments in local processing operations to qualify for the duty waivers.

The intention was to prevent the market from being flooded with imports that could undermine local agriculture, while still allowing for the importation of essential goods to stabilize prices.

However, the implementation of this policy has been delayed, causing doubts about the government’s commitment to reducing food inflation. Many argue that the stringent eligibility requirements, such as mandating that companies be operational for at least five years and fully compliant with tax obligations, create barriers that limit the potential impact of the policy.

Additionally, the stipulation that at least 75% of imported goods be sold through recognized commodity exchanges creates another hurdle for importers.

The World Bank’s recommendations extend beyond food import to address broader economic concerns, including the fiscal implications of wage increases and public sector pay adjustments.

While efforts to raise wages can provide some relief to workers amid rising living costs, they also carry the risk of worsening Nigeria’s fiscal deficit, given the already strained government finances. The bank noted that public sector wages are disproportionately high compared to those in the private sector, with additional barriers to entry into public sector jobs locking out poorer Nigerians from accessing these opportunities.

This disparity in wage distribution suggests that policies targeting wage earners may not effectively address the deeper issues of poverty and economic inequality.

This is so because Nigeria’s persistent food inflation and high cost of living continue to pose challenges for economic management. The country remains heavily reliant on food imports, with domestic agricultural productivity struggling to meet the demands of a growing population.

While temporary duty suspensions on food imports aim to alleviate cost pressures, the World Bank also noted that the underlying structural issues in the agricultural sector need to be addressed to achieve long-term price stability.