Forecasting Salary Increases in Nigeria: A Scientific Approach to a Complex Challenge

“Sharon, please could you give Finance the forecast Nigerian salary increase percentage for 2025 and the projected increase in our salary cost”

We stated in our article dealing with the South African salary forecast for 2025 (Click here to view this article) that this request normally sparks a sense of foreboding as it is a clear indication that the annual salary increase process is imminent- with all the associated angst, issues, problems, heated negotiations and hard work that is required.

In Nigeria, this question would spark sheer terror and there is little doubt that Sharon would break out in a cold sweat!
Formulating salary increases in Africa can be a difficult undertaking for organisations but historic economic factors have rendered this an almost impossible task in Nigeria.

QUICK HISTORY LESSON

INFLATION

Inflation has remained high in Nigeria for several years because of structural issues, as well as external imbalances. A food crisis, heightened insecurity, a misaligned exchange rate and dollar illiquidity, and supply chain disruptions are some key domestic contributors.

Inflation has averaged:

  • 2022 18.80%
  • 2023 24.50%
  • 2024 32.40% (expected)

PETROL PRICES

Nigerians have benefited from cheap petrol due to subsidies which were introduced in the 1970s. Nigerians regarded the subsidy as a direct benefit of the country’s oil wealth. The government estimated that the petrol subsidy cost them circa. US$ 10 bn per fiscal year. In President Bola Tinubu’s first address in late May 2023, he abolished the subsidy. The immediate effect was that the petrol price increased from NGN 254 in April 2023 to around NGN 535. The price then steadily increased to around NGN 800 until the state-owned oil company NNPC increased petrol prices to just under NGN 1,000 in early October 2024.

THE NAIRA

The much-beleaguered currency has depreciated significantly over the last year

Whilst the depreciation has resulted in more expensive imports (and concomitantly imported inflation), the significant lack of dollars in the market has made it impossible for international companies to repatriate profits or dividends. Little wonder that many international companies are scaling down operations or exiting Nigeria – Shoprite, Tiger Brands, Woolworths, Microsoft, Bayer AG, Unilever, Proctor & Gamble, Kimberley-Clark to name a few.
We have long advocated that clients adopt a scientific approach to the preliminary salary increase forecast and then use the unfolding economic data over the next few months to update the original forecast. Unfortunately, this is of little assistance in Nigeria but in the absence of an alternative methodology, let’s follow the process.

INFLATION

Our departure point in the forecast process is to determine the expected inflation rate for 2025. Salary increases are implicitly linked to inflation; where inflation is one of the most important determinants when deciding on the quantum of the salary increase. Employees want to retain the same purchasing power with their remuneration from one year to the next.
Consistent with the Axiomatic methodology, a “forward looking” approach must be adopted where inflation is forecasted for 2025, and the proposed salary increase is based on this result. We remain firm advocates of this methodology as it calculates the amount of the salary increase which will be “forfeited” to inflation. The alternative approach, namely the “backward looking” methodology, uses the previous year’s inflation rate which is “sunk” and thus does not exert an influence on the additional purchasing power given to the employee by granting him or her an increase.
Nigeria’s historic inflation rates and the Axiomatic forecast for the remainer of 2024 and 2025 are detailed in the table below:

REAL SALARY INCREASE

The next step in the scientific process is to establish the possible quantum of the “real increase”. A real increase is defined as the increase after inflation has been considered. As an example, if the salary increase is 6.0% and inflation is 4.0%, then a 2.0% real increase has been granted.
The quantum of real salary increases in Nigeria is impossible to benchmark, given that employers have adopted diverse ways to protect employees against the ravages of inflation. Some have granted interim increases while others have introduced an inflation or hardship allowance.
One can however safely conclude that employees have received negative real salary increases over the last few years.

FORECAST OF 2025 SALARY INCREASE

Normally we would take the projected inflation rate, add the historic real salary increase and with a significant degree of confidence, recommend a salary increase for 2025. This is not possible in Nigeria.

POSSIBLE OPTION

A feasible and equitable option may be to introduce an Inflation Allowance (“IA”).

1. A salary increase of 20.0% is granted.
2.  An IA is instituted and clearly communicated to employees.
  • The trigger would be 25.0%.
  • If inflation in any given month is greater than 25.0%, the difference between 25.0% and the prevailing inflation rate would be paid to the employee as a monthly IA.
  • If inflation is below 25.0%, no IA is paid.
  • If our inflation forecast is correct, the IA would be paid in January, February and March 2025 but would then cease.

3.  The advantages of an IA include inter alia, the following

  • The IA Policy will bolster, augment and improve the Employee Value Proposition (“EVP”). Employees will realise and appreciate that the employer understands the increasing and volatile cost of living pressure and is prepared to assist.
  • This decisive action will hopefully furnish the company with a tangible Return on Investment because it will reduce staff turnover, improve the EVP and mitigate the high cost of recruiting new employees.
  • Most importantly, the IA ensures that high fixed employment costs are not entrenched in perpetuity; rather only some temporary relief is afforded to employees.
As can be appreciated by the above discussion, formulating a cogent and equitable salary increase for Nigeria is difficult. The decision must also take cognisance of the financial health of the employer and a myriad other factors.
Over the coming months Axiomatic will continue to update our 2025 recommended salary increase in response to new data, include some quantitative considerations and discuss some emerging trends we are observing in the market.

Need help navigating the complexities of salary increases in Nigeria? Contact us to discuss your organization's specific needs and learn how we can support you in making informed decisions.

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