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NIGERIA AN UPDATE ON OUR 2025 SALARY INCREASE FORECAST

Nigeria: An Update on our 2025 Salary Increase Forecast

In our August 2024 article (click here) we stated that when the CFO asked Sharon to provide Finance with the forecast Nigerian salary increase percentage for 2025, she broke out in a cold sweat.

Here’s an update on Sharon: She’s now bedridden. The main cause of her deteriorating health condition is that all economists expected inflation to decline from June. This has not happened, and in fact, inflation increased in October 2024.

The increase in inflation in October was the result of food inflation increasing by 39.2% because of the floods and was also exacerbated by the petrol price increases. Nigeria’s historic inflation rates and the revised Axiomatic forecast for the remainder of 2024 and 2025 are detailed in the table below:

Our average 2025 inflation rate has increased from 23.8% to 28.5%.

When determining an equitable salary increase, we would normally 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.

We reiterate the advice contained in our August article that a feasible and reasonable option may be to introduce an Inflation Allowance (“IA”). The mechanics of a possible IA methodology can be summarised as follows:

A 20.0% salary increase is granted.
An IA is instituted and communicated to employees.
- The trigger would be 30.0%.
- If inflation in any given month exceeds 30.0%, the difference between 30.0% and the prevailing inflation rate would be paid to the employee as a monthly IA. The calculation of the IA would be done on Basic Salary.
- If inflation is equal to or below 30.0%, 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.
- If the company’s increase cycle commences in April, a 28.0% trigger level could be considered.

As we stated in our previous article, the salient advantage of an IA is that employees will realize and appreciate that the employer understands the increasing and volatile cost of living pressure and is prepared to assist. Further, if inflation remains high, the employer will bear some of the pain.

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.

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UPDATE ON THE SOUTH AFRICAN SALARY INCREASE FORECAST FOR 2025

NOVEMBER 2024 UPDATE

In August 2024, we published our 2025 South Africa Salary Increase Forecast article Click Here, in which we suggested that a salary forecast is not difficult. We encouraged clients to 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 estimates. These were wise words, as the October 2024 inflation rate was a shocking but welcome surprise.

Inflation slowed from 3.8% in September to 2.8% in October – the lowest reading since the 2.2% recorded in June 2020 when we were in the throes of the Covid pandemic. The salient reasons for the dramatic drop were the lower petrol price, local and international food prices, and the stronger rand because of the optimism associated with the formation of the Government of National Unity. Importantly, this reading of 2.8% is below the bottom of the Reserve Bank’s 3.0% to 6.0% target range.

The bad news is that there will be pressure on inflation over the next few months. The main reasons include the possible changes in US economic policy emanating from a Trump presidency, potentially higher oil prices resulting from the escalating Ukraine war and increased electricity and administered prices.

The MPC also warned about possible higher inflation at the November 2024 MPC meeting when they stated, “In the near term, inflation appears well contained. However, the medium-term outlook is highly uncertain, with material upside risks. These include higher prices for food, electricity and water, as well as insurance premiums and wage settlements.”

Our revised inflation forecast is:

Our forecast for 2024 has decreased from 4.9% to 4.5%. Our forecast for 2025 has been revised lower from 4.5% to 4.2% and is slightly above the MPC Committee’s forecast of 4.0%.

This does of course, mean that employees will receive a higher real salary increase in 2024 – 1.5% compared to the “new normal” yardstick of 1.0%.

Our August article recommended a 5.5% salary increase for 2025, and one must pose the question of whether this incoming data changes this recommendation. A purely scientific approach would recommend the following:

Inflation in South Africa is notoriously difficult to predict as same is always subject to exogenous shocks. One must recognise this danger and the concern expressed by the MPC Committee that “…the medium-term outlook is highly uncertain, with material upside risks”.

Cognisance must also be taken of the following:

The average real salary increase granted to employees over the last 5 years has only been 0.5%. A slightly higher 1.3% real salary increase this year will compensate employees for the erosion of their disposable income over the last 5 years; and
We highlighted in our recent article (click here) that medical aid costs will increase by between 9.30% and 12.75% on 1 January 2025. Given the dominance of the TCTC remuneration model in South Africa, many employees will have to foot the bill themselves for these increases.

Given this, our recommendation is to stick to our August 2024 forecast:

2025 RECOMMENDED SOUTH AFRICA SALARY INCREASE 5.5%

Plan Smarter for 2025: Refine your salary strategies with our expert recommendations. Click the button below to learn more!

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PAYROLL COMPLIANCE IN AFRICA : THE HIGH COST OF CUTTING CORNERS

Payroll Compliance in Africa: The High Cost of Cutting Corners

What does payroll compliance mean?

In the past, payroll compliance was focused primarily on the process and was audited, controlled and managed by the ubiquitous internal audit procedure. Those of us in the payroll space are all too familiar with a group of auditors descending on our office once a year to check:

Payroll audit files
Ask for audit trails and files to ensure all instructions in the payroll followed a predefined process.
Audit the access controls and adherence to these.
Audit segregation of duties.
And of course, asking idiotic non-related questions.

Seldom are the actual tax and social security calculations back tested; probably because the internal auditors do not have the training and/or knowledge to test such calculations.

In addition to the above, there is an emphasis on annual or regular IT audits. These are invaluable to ensure that the payroll platform used to both process and transfer data are aligned to the IT risk strategy of the business and comply with the relevant data processing laws in the country.

Once again, the current audit process focuses on process, access and platform security along with adherence to a predefined process. To mitigate the cost of regular audits, payroll platforms and even employers incur the cost of subscribing to ISO27001, ISEA3402 or SOC type audits to ensure the payroll is compliant.

The above ensures the platform’s compliance but does not ensure the accuracy of the statutory calculations, withholding and reporting requirements. In the African payroll environment, this is important given that local revenue authorities have no reluctance to levy exorbitant fines on employers. And international companies are prime targets for this treatment. Many employers tend to think that choosing a credible payroll platform implies accurate statutory calculations- think again!

We are not saying that the system providers perhaps do not align the platform with the legislative requirements. They do but a payroll platform facilitates compliance – it does not guarantee compliance.

The evolution of payroll systems has meant that most are now heavily customizable and/or highly configurable to ensure they can accommodate the diverse range of needs and salary structures one observes in Africa. Payroll systems therefore must be configured correctly and amended to comply with new regulations.

Internal audit reviews will interrogate the integrity and compliance of the system but in our experience, the greatest compliance risk is incorrect taxation or calculation errors which may lead to massive financial risk. In addition, fines being levied may get into the public domain which may lead to reputational risk for the company.

To address, and ultimately mitigate this risk, Axiomatic now offers a Payroll Health Check.

The Health Check will reverse calculate the payroll for the tax year of assessment in the country, taking cognisance of the tax and social security legislations and regulations. The objective is to determine if the configuration and operation of the payroll is compliant.

Axiomatic's Payroll Health Check ensures your payroll is compliant by reverse calculating the tax year's assessment with full adherence to tax and social security regulations. Click the image below to have a conversation with us.

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NIGERIA SALARY INCREASE FORECAST FOR 2025

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:

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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KENYA 2025 SALARY INCREASE UPDATE

Kenya Salary Increase Forecast 2025: Aligning with MPC's Inflation Outlook

Our recent article, Kenya Salary Increase Forecast for 2025, explained the methodology we adopted to derive a 5.75% salary increase forecast for 2025 – Click Here to read this article.

The Kenyan Monetary Policy Committee (“MPC”) met on October 8, 2024, and it always insightful to examine this committee’s thoughts on inflation, to identify if their economic forecasts are different to ours. Our model is forecasting inflation to average 4.40% in 2025, significantly below 5.00%, which is the middle of the inflation target range.

At the meeting, the MPC stated:

“ Kenya’s overall inflation declined to 3.6 percent in September 2024 from 4.4 percent in August, thereby remaining well below the mid-point of the target range. … Non-food non-fuel (NFNF) inflation eased to 3.4 percent in September from 3.5 percent in August, reflecting the lagged effects of previous monetary policy tightening. Overall inflation is expected to remain below the mid-point of the target range in the near term, supported by lower food inflation owing to improved supply from the ongoing harvests, a stable exchange rate, and stable fuel prices.”

“The MPC noted that overall inflation has declined further and is expected to remain below the midpoint of the target range in the near term, supported by stable food inflation attributed to improved supply from the ongoing harvests, a stable exchange rate, and lower fuel inflation.”

As an aside, the Committee decided to lower the Central Bank Rate from 12.75% to 12.00% which should furnish cash strapped employees with some relief.

Given this incoming data, and the fact that the MPC Committee agrees with our forecast that inflation will remain below the midpoint of the inflation target, we remain comfortable with our previous salary increase recommendation:

While this salary increase will provide employees with a real salary increase of 1.39%, it does take cognisance of the increased social security deductions highlighted in our previous article and concomitantly ensure employees maintain their purchasing power.

We will continue to monitor future developments and provide regular updates.

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