2021: Another year of stress test for manufacturers
At the beginning of the year, insights showed that a larger part of consumer spending will go into food and other essential commodities.
A survey of the Central Bank of Nigeria (CBN) equally suggested that consumers would continue to exercise in-spending till inflation eases.
For the local manufacturing industry, the concern has been how to absorb the impact of the increase in the cost of raw material, occasioned by currency devaluation, without necessarily raising the price for many products.
With weak disposable incomes and unavoidable increases in prices, the real sector has managed to survive another stress test. With new taxes in 2022, can the real sector cope? FEMI ADEKOYA writes.
With the pandemic still raging in the form of a new variant, reports envisaged that people will continue to take a cautious approach to mingle in crowds and will spend more time at home than in previous years, a behaviour that will increase household expenditure on food and other essential commodities.
Unlike 2020 however, restrictions have been milder considering the effects on value-chain sectors that the manufacturing sector depends upon to drive consumption and improve sectoral GDP.
While spending has been largely focused on food and essential commodities, food inflation has equally made it challenging for many households whose incomes have not witnessed any improvement. Indeed, the disparity between income and inflation has become wide, mounting pressure on how much can be defined as disposable spending.
Ideally, if salaries increased at the same rate as inflation, there would be no hardships. Unfortunately, inflation is not an across-the-board price increase. Prices of different commodities increase at different rates at different times, affecting different sections of the population. For many Nigerians in recent times, access to food and consumer items is getting difficult by the day.
Unlike in advanced nations like the US, Japan where some level of inflation is tolerable to stimulate economic activities, Nigeria’s inflationary trend is detrimental to its growth due to its structural deficiency, logistic problems, insecurity, among others.
Indeed, many of the factors that have fueled Nigeria’s high inflation are not showing any signs of receding.
For the common man, the effect of inflation is felt when the purchasing power of the naira falls, that is, what one could use to buy a kilogram of rice, will now fetch only half a kilogram. Also, commodity wholesaler dealers may try to hoard essential commodities like food grains in hopes of reaping profits when prices increase further on dwindling supplies.
Similarly, fixed income groups will be hit the hardest because their salaries will not be revised to include the cost of living even as prices of items soar, while household, as well as national savings, drop because there is less money to save now as people use a greater part of their disposable income to pay for daily-use commodities.
Data from TradeDepot, the B2B eCommerce platform for consumer goods in Africa, showed that the impact of the pandemic, rising inflation, border closures and other issues that drove significant changes in behaviour for retailers, distributors and manufacturers in 2020 will remain dominant this year. The validity of the data is evident in consumer expenditure during the year.
The report projected that manufacturers would adapt to rising inflation and dwindling disposable income by extending the trend of smaller packs to other product categories. It added that manufacturers would explore more alternative route-to-market channels with capabilities to build retail networks and offer logistics-as-a-service to mitigate the risks that come with serving new customer bases.
CEO and Co-Founder of TradeDepot, Onyekachi Izukanne, said: “The retail sector is one of the strongest pillars of the Nigerian economy. Infrastructure and logistics issues that undermine the efforts of the industrious business owners also hamper the sector. With some more support from the government, public institutions and private sector players, there is an opportunity to transform the Nigerian retail market and achieve a quick win for boosting the GDP”.
Burden of increased taxes amid forex challenges
Despite improved confidence in the economy as shown in the latest Manufacturers Confidence Index (MCCI) by local manufacturers, demand for foreign exchange (forex) on the back of outstanding obligations has risen to about $2 billion as local producers appear to be running out of options for survival.
With a weakened currency that is trading at N570 to the greenback, as well as the effect of inflation on household incomes, local producers are worried about their inability to access foreign exchange for raw materials and needed machinery.
While a request of about $1.45 billion from various firms has been put forward to the apex bank in the first quarter of the year, an additional $300 million demand was submitted in the second quarter; thus, pushing outstanding demand to at least $1.75 billion.
Last year, a similar trend was observed, forcing many local producers to resort to the parallel market, in a move that triggered inflation and affected demand for locally produced goods.
Only recently, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, said, during a public hearing on the 2021 Finance Bill, which was organised by the House of Representatives Committee on Finance that the federal government would introduce new tariffs and levies in 2022 in the 2021 Finance Act as part of its reforms and amendments of the country’s tax laws.
However, the Nigerian manufacturers and members of the Organised Private Sector of Nigeria (OPSN) have asked the federal government for breathing space and to spare business further taxation. They noted that any move by the government to increase taxation in whatever form or guises would be counterproductive and retard the contribution of the manufacturing sector to the GDP and cause a great setback on the ability of the real sector to support the poverty reduction/alleviation and job creation aspirations of President Muhammadu Buhari’s administration.
The Manufacturers Association of Nigeria (MAN), stated that manufacturers in the country have been groaning under multiple taxations from the three tiers of government. It also said that its members are quite anxious about the imminent ill-advised re-introduction of excise, as well as a steep increase in the rate of excise on some products, including carbonated and non-alcoholic drinks and tobacco products.
It pleaded that manufacturing businesses are yet to fully stabilise from the debilitating disruptive effect of the COVID-19 pandemic, adding that the so-called relief funds from the government have remained largely non-accessible to manufacturers. No thanks to the country’s illiquid foreign exchange market that cannot accommodate their demands for hard currencies on the official FX window.
The Director-General of MAN, Mr. Segun Ajayi-Kadir, said: “The tendency is (for the government) to heed the advice from the World Bank and the like for more taxation in developing economies. But it has not considered that this has not led to appreciable growth in their economies. There is a need for wisdom in gauging the times we are in and assessing the possible boomerang effects on our beleaguered socio-economic environment.
“With low and worsening disposable income, heightening insecurity and anxiety, caution is the word. What could be within reasonable contemplation should be widening the tax net to capture the largely untaxed endeavours that ought to have been within the tax bracket.
“I would like to believe that what the Honourable Minister (of Finance) was referring to is that the net will be expanded to capture those and not that existing legitimate and diligent taxpayers would be made to pay more or that additional taxes would be levied upon them. That will be counterproductive and the envisaged additional revenue may not be realized. Instead, we may start to witness dwindling profitability, higher rate of business failure and a predisposition to tax evasion. This is not to mention the disincentive to local and foreign investment.”
The Founder/Chief Executive Officer of Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, stated that the reintroduction of excise duty is also a negation of the economic recovery, job creation and poverty reduction aspirations of the federal government.
According to him, many upcoming small businesses in the beverage sector would be hard hit by this proposal, noting that the millions of micro-enterprises in the soft drinks’ fruit juice distribution chain will be adversely impacted by the imposition of the excise tax.
“Nigerian manufacturing companies, and indeed most investors, are going through tremendous stress at the moment. They are currently grappling with serious macro-economic challenges and structural constraints impacting capacity utilization, productivity and competitiveness. This is affecting sales, turnover, profitability, shareholder value and the sustainability of investments.
“The norm globally at this time is to provide incentives for industries to aid their recovery from the shocks of the pandemic and escalating costs. We cannot afford to be doing the exact opposite. Manufacturers, across all product segments, need a respite, especially in the light of the unprecedented escalation of production and operating costs”, he added.
Can consumer spending keep pace with a slow-paced economy?
With key indices maintaining a slow-paced movement despite the optimistic outlook expressed by consumers, spending is not likely to improve or move to a high altitude except jobs are created and sectors fuelling such spending equally witness a turnaround. It is unlikely that consumers will continue to grow their spending so much faster than their incomes are rising.
However, for economic recovery to be sustained, it is important to create an enabling environment for positive investor sentiments in the economy. This should be driven by policy, regulation, macroeconomic conditions, and security of lives and properties.