Nigeria’s real affordability problem, By Dipo Baruwa

The real policy challenge is, therefore, not merely how much should a Nigerian worker be paid? It is also what kind of economic system surrounds that worker, how much productive value does that system enable the worker to generate, and how much of that value survives the structural costs imposed between earning an income and meeting the basic requirements of everyday life?

In recent weeks, there has been extensive commentary on the Federal Government’s scorecard, including economic stability, nominal GDP growth, the steady supply of petroleum products, tax administration reforms, greater responsibility by state governments for paying workers’ salaries and, most significantly, increased revenue shared among the three tiers of government. These developments have largely been presented as evidence of improved economic conditions, more responsive governance and enhanced citizen welfare.

What has received less attention, however, is the social and economic cost of adjustment associated with the major economic decisions taken by this administration: the removal of the petroleum subsidy and the floating of the naira. Both have contributed significantly to the sharp rise in the real cost of living across the country. This also raises a related problem: the tendency to compare Nigeria’s pump price of petroleum products with those of other countries at face value.

Nigeria’s Affordability Problem

Consider a simple affordability comparison. At Nigeria’s minimum wage of ₦70,000 per month, and assuming a standard working week, a worker would need to work for roughly three hours to earn enough to buy one litre of petrol at ₦1,300. The equivalent is approximately 50 minutes in South Africa, 10 minutes in Germany and 6 minutes in the United Kingdom.

This comparison speaks more directly to living conditions than a simple comparison of pump prices. Fuel prices cannot be assessed in isolation from the economic environment in which citizens earn and spend their incomes. A worker in Germany, South Africa or the UK may pay a higher nominal price for petrol, but that price exists within a different productive and institutional context: higher incomes, more reliable electricity, better public transportation, stronger logistics systems, greater industrial capacity and more efficient public services.

The relevant question, therefore, is not simply whether petrol in Nigeria is cheaper or more expensive in dollar terms. It is how much of a worker’s income is required to purchase it and how extensively fuel costs are transmitted into the prices of transportation, food and other essentials. The latter reflects the effect of logistics costs on the prices of goods and services.

The same principle applies to wages. Comparing Nigeria’s minimum wage with wages elsewhere without accounting for productivity, purchasing power and the wider cost structure of each economy can be equally misleading. A higher nominal wage does not automatically translate into a higher standard of living, just as a lower nominal fuel price does not necessarily mean that fuel is more affordable.

Removing the Cushion from a Vulnerable Economy

In Nigeria, the removal of the petroleum subsidy and the floating of the naira intensified this imbalance. Their implementation also effectively removed significant forms of economy-wide price cushioning from a system in which the informal economy remains a major source of employment, household income and everyday economic activity.

This matters because much of the informal economy operates without the buffers available to larger formal businesses. Small traders, artisans, transport operators, farmers and micro-enterprises depend heavily on petrol-powered transportation and electricity generation, imported or import-dependent inputs, and relatively narrow operating margins. The petroleum subsidy and managed exchange rate regime may not have been designed specifically as support mechanisms for the informal economy, but they nevertheless provided important price cushions within the environment in which these activities operated.

Under these conditions, a higher minimum wage may be necessary, but it will not be sufficient. If wages rise while electricity, transportation, food, taxation, housing and other essential costs rise alongside them, the increase can quickly be absorbed. The worker receives more naira but commands little additional real value. The improvement is, therefore, nominal rather than fundamental.

Removing those cushions without simultaneously strengthening the productive capabilities and social infrastructure needed to absorb the adjustment transferred a substantial part of the cost directly to households and small businesses.

The depreciation of the naira raised the domestic cost of imported goods and inputs, including fuel, machinery, raw materials, transportation equipment and other essentials. Higher fuel prices, in turn, fed into transportation, production and distribution costs. These pressures travelled through the economy, reducing operating margins, raising consumer prices and eroding the real value of wages.

The issue, therefore, is not simply whether the subsidy should have been retained or whether the exchange rate should have remained administratively managed. The more fundamental question is whether the economy possessed sufficient productive, infrastructural and institutional capability to absorb the transition without imposing a disproportionate burden on the citizens and enterprises least able to withstand it.

Why a Higher Minimum Wage Is Not Enough

This is also why Nigeria’s affordability crisis cannot be sustainably resolved by increasing the minimum wage alone.

An upward adjustment in wages may provide an important short-term cushion for households, but wages are ultimately claims on the productive output of an economy. Raising those claims without a corresponding expansion in productive capability risks producing only a nominal improvement in income, while the underlying pressures on the cost of living remain unchanged.

The deeper policy question is therefore: how much productive value does the economy enable a worker to generate, and how cheaply can essential goods and services be produced and delivered?

The advantage enjoyed by workers in countries such as Germany, South Africa and the UK is not simply that statutory wages are higher. Their economies generally possess deeper productive capabilities, more reliable infrastructure, stronger logistics systems, broader formal employment opportunities and more efficient mechanisms for transforming labour into economic value.

The more consequential policy objective must be to enhance the economy’s capacity to create, move and retain wealth. This requires reliable and competitively priced energy, improved transport and logistics, greater productive capacity within firms, expanded employment opportunities, reductions in agricultural and distribution losses, improved security, more efficient public administration, and stronger transparency and accountability in government.

Nigeria faces the opposite pressure. Electricity remains expensive when considered alongside the unreliability of supply, forcing many households and businesses to pay both for grid electricity and alternative energy. Taxes, levies and administrative charges increase the claims placed on already constrained incomes. The costs of accessing healthcare and education continue to rise. In the absence of efficient and affordable mass public transport, much of the population depends on privately operated services whose prices respond directly to fuel, maintenance and exchange rate pressures.

Transportation, therefore, illustrates how quickly structural costs spread across the economy. Higher petrol prices affect not only motorists. They increase the cost of commuting, food distribution, logistics and production, and ultimately become embedded in the prices households pay.

The same is true elsewhere in the productive system. Unreliable infrastructure raises production costs. Insecurity increases the risks associated with farming, transportation and investment. Weak storage and logistics contribute to farm-to-market losses. Limited access to affordable finance constrains firms from expanding and employing more workers. Administrative inefficiencies and weak transparency impose further transaction costs on businesses and citizens.

Under these conditions, a higher minimum wage may be necessary, but it will not be sufficient. If wages rise while electricity, transportation, food, taxation, housing and other essential costs rise alongside them, the increase can quickly be absorbed. The worker receives more naira but commands little additional real value. The improvement is, therefore, nominal rather than fundamental.

The more consequential policy objective must be to enhance the economy’s capacity to create, move and retain wealth. This requires reliable and competitively priced energy, improved transport and logistics, greater productive capacity within firms, expanded employment opportunities, reductions in agricultural and distribution losses, improved security, more efficient public administration, and stronger transparency and accountability in government.

Affordability is determined not only by how much people earn, but also by how efficiently an economy produces and delivers what they consume. A vibrant domestic production base is critical to improving productivity, reducing import dependence and enhancing affordability across the economy.

The real policy challenge is, therefore, not merely how much should a Nigerian worker be paid? It is also what kind of economic system surrounds that worker, how much productive value does that system enable the worker to generate, and how much of that value survives the structural costs imposed between earning an income and meeting the basic requirements of everyday life?

Dipo Baruwa is a business climate development analyst.