ARCHIVE: Policies to Increase National Disposable Income
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.
And you know that a borrower can easily become a slave to a lender if he is not able to meet his obligations to the lender.
FSDH Research looks at the total income that was available for use by residents and firms in Nigeria (usually referred to as National Disposable Income or NDI) between Q1 2016 and Q2 2018 and concludes that it was weak and cannot take the country to the ‘Promised Land’.
Therefore, something urgent must be done so that the country will not continue to rely on excessive borrowing or avoid a situation where savings will continue to drop.
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 operating surplus dominated the total national disposable income, which represented an average of 69% during the period.
However, the growth in the inflation rate during the same period, at 37.14%, was higher than the growth in the operating surplus at 32.85%.
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% to the total NDI between Q1 2016 and Q2 2018.
A combination of profit of firms and household compensation contributed 96% of total NDI. Nevertheless, it grew by 38.33% marginally higher than the inflation rate during the period.
The high costs of running businesses in Nigeria caused by ineffective institutions to enforce law and order, insecurity, defective infrastructure, and inadequate support systems for new businesses are the major factors responsible for the weak growth in profit.
The high unemployment level in the country, insufficient new job opportunities and the large informal sector are all responsible for weak growth in household compensation.
FSDH Research offered suggestions into the high unemployment situation.
The weak NDI limits consumption of households, government and investments by firms. We note that little income is channeled 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.
As noted earlier, one can also link the weak income generation to the weak household consumption.
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.
It is cheaper to stimulate the economy through appropriate policies to grow the NDI, than relying on borrowing.
There must be removal of all administrative delays in obtaining licences and approvals.
This includes titles to landed properties for building and agricultural purposes. Government should also invest in data generation in the solid mineral sector.
It can sell the data to potential investors interested in the sector. This will reduce the risk inherent in this untapped sector of the economy.
There is the 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.
ARCHIVE: Policies to Increase National Disposable Income
