Nigeria: Mounting Concerns Over Nigeria's Weak Disposable Income

19 March 2019

Concerns have continued to mount over continuous depletion in the country's disposable income, which stood at N30 trillion as at second quarter (Q2'18).

Analysts at FSDH Merchant Bank expressed the concern in a report themed: "Policies to Increase National Disposable Income (NDI)", saying that the federal government needs to formulate policies to address the weakness.

National Disposable Income (NDI) refers to the total income available for use by residents and firms in Nigeria over a particular period.

They stated that the National Disposable Income during the review period (Q1'16 to Q2'18) was weak, saying that formulating policies to increase the country's disposable income would stimulate economic growth.

According to the analysts, weak NDI limits consumption of households, government and investments by firms.

Consequently, they said that urgent measures are required to shore up the NDI in order to discontinue over-reliance by the government on excessive borrowing and also avoid a situation where savings will continue to go down.

FSDH further stated that weak NDI accounts for high-interest rate and also makes it impossible to achieve a single-digit interest rate regime in the country.

"The weak NDI limits consumption of households, government and investments by firms. We note that little income is channelled into savings and investments. This is also one of the reasons the interest rate on loans is high, and a single digit interest rate may not be achievable in the short-run.

"If an individual, business, government or, by extension, a country wants to increase its spending and savings power, there must be a plan to increase the ability to generate income. Any entity that desires to increase its spending and savings without a plan to increase its ability to generate income will surely have to borrow to fill the gap, all things being equal," it said.

The Report showed that National Savings has been on the steady decline during the period under, dropping to N6 trillion in Q1'18 and Q2'18 each compared to N8 trillion and N9 trillion in Q4'17 and Q3'17 respectively.

"The total income available for use by residents in Nigeria comes from four major sources. The total remuneration of employees in the formal sector, operating surplus (profit of businesses), total taxes payable on products, minus any subsidies received for the product, and the net income, transfer and profit from abroad. Our analysis shows that the operating surplus dominated the total national disposable income, which represented an average of 69 per cent during the period. However, the growth in the inflation rate during the same period, at 37.14 per cent, was higher than the growth in the operating surplus at 32.85 per cent. Therefore, in reality, the operating profit contracted.

"Again, household compensation was low. This is made up of salaries of employees in the formal sector including benefits in kind (such as pensions). Our analysis shows that household compensation contributed on average 27 per cent to the total NDI between Q1 2016 and Q2 2018. A combination of profit of firms and household compensation contributed 96 per cent of total NDI. Nevertheless, it grew by 38.33 per cent marginally higher than the inflation rate during the period.

FSDH affirmed in the Report that weak income generation could be linked to the weak household consumption, adding that low level of household consumption also reduces government tax, particularly Value Added Tax (VAT).

"In addition, it reduces the amount that is available to purchase goods and services produced by firms. Ultimately sales drop, profit drops, tax income drops and a firm will not be able to sell as much as it should sell to enable it to expand production; the firm will not be enabled to employ more people."

Solutions to NDI growth

To fix the NDI income, the firm said that there must be the removal of all administrative delays in obtaining licences and approvals including titles to landed properties for building and agricultural purposes.

Additionally, the government should also invest in data generation in the solid mineral sector, it suggested, saying that such data could be sold to potential investors interested in the sector.

"This will reduce the risk inherent in this untapped sector of the economy. There is a need for human capacity building in business management and leadership. This must not be left to business schools, which are only affordable to a few people.

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