How hike in excise duties sound death knell for local manufacturing
• New policy will fuel illicit trade, industry recession, layoffs, MAN warns • VAT increase adding extra burden on struggling OPSN, NACCIMA laments
• High energy costs, forex scarcity, Naira crunch impede manufacturing • LCCI: Manufacturing outlook not encouraging
IF the newly released fiscal policy measures for 2023 by the Federal Ministry of Finance, Budget and National Planning, which was approved by President Muhammadu Buhari stand, many manufacturing and production industries may likely go under, stakeholders warn.
MAN’s Director General, Segun Ajayi-Kadir, has said that the increase in excise tax for 2023 and 2024 as provisioned in the said 2023 fiscal policy, came as a shock to them because, as a major stakeholder, MAN had actively participated in the deliberations on the proposal and presented various positions from its members across all sectors, especially those directly impacted by the proposed measures.
He said that following a meeting held with the Minister of Finance on March 29, they were informed that the 2023 proposals on additional excise tax increases were being stepped down until further consultations on the 2023 Finance Bill. Additionally, he said the Nigeria Customs Service (NCS) was notified by the Federal Ministry of Finance that the existing fiscal policy measures for 2022 as they relate to alcoholic Beverages and tobacco products, will take effect from June 1, 2023 and June 1, 2024 as approved in the 2022 Fiscal Policy Measures roadmap for 2022 to 2024.
He added that based on the above, their members had finalised yearly strategies and projections while exporting members had concluded pricing negotiations for orders to the end of this fiscal period, on the strength of the agreed excise roadmap and recent assurance from the fiscal authority.
He regretted that the release of the 2023 fiscal policy measures, just over a month to its expected implementation date and the end of the current administration, sends negative signals to investors.
Ajayi-Kadir described the current situation as worrisome, saying it is indicative of inconsistency in government policy, given that industries that are affected by excise tax administration already made plans based on the agreed calendar. He added that this might create credibility issues for the country with existing and potential investors, impact Foreign Direct Investments (FDIs) and the country’s Ease of Doing Business index among other implications.
“It is therefore alarming and concerning that the implementation of the 2022 to 2024 approved excise roadmap, has unfortunately not even been implemented for up to a year, before the Federal Government decided to ‘shift the goal post’. This was done without any consultation or assessment of the impact of the huge increases, which in some cases are up to 50 per cent on ad valorem (according to the value) and 75 per cent on specific duty rates, over and above the already approved high increases of up to 50 per cent and 45 per cent respectively. Ironically, based on data, government is unlikely to earn more revenue from further excise increases due to significant decline in sales by companies in this sector, yet the new policy is likely to fuel illicit trade, erode members’ market share and revenue, raise inflation, increase unemployment and redundancy and squeezed margins, recession, capacity underutilisation, layoffs and so on. The unilateral action by the government, despite the complaint and persuasion by stakeholders for the fiscal authority to consider the consequence on the industries, businesses and the economy as a whole, is quite unfortunate,” he said.
He added that apart from above challenges faced in the business environment, manufacturers also have to contend with currency devaluation and increasing inflation resulting in higher cost of production as they have little to no access to foreign exchange at the official window and have to resort to the parallel market.
“All these are without regard to the industry’s contribution to the Nigerian economy in the way of significant taxes being paid (excise, corporate income tax, value added tax/VAT etc.); export revenue in foreign currency; employment of thousands directly and indirectly including supply chain partners in the Small and Medium Enterprises (SME) sector as well as Corporate Social Responsibility (CSR) to the local communities and other stakeholders nationwide.”
He pleaded that in addition to the issue of excise tax increase, the Import Adjustment Tax (IAT) on Motor Vehicle (Chapter 87) and single use plastic surcharge of 10 per cent should be reconsidered. He, however, said the latter is ill timed and hasty. He said the proposed increase in the recently released 2023 guidelines on Beer, Wines and Spirits and Tobacco, has the potential to trigger unprecedented distortions in the affected industries as well as the entire manufacturing sector.
“We urge the FG to maintain the status quo regarding the already government-approved excise duty increases on these items. The industry cannot afford any further increases at these extremely challenging times,” he said.
The National President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Ide John Udeagbaala, regretted the degenerating ease of doing business in the country, which he said has put a serious strain on the production and manufacturing industry of the economy.
Revealing that the Organised Private Sector in Nigeria (OPSN) is already struggling, with many members going under due to the skyrocketing cost of doing business, he warned that the proposed VAT increase from 7.5 to 10 percent lead to the shutdown of many SMEs and worsen the unemployment crisis in the country.
He revealed that businesses already pay a staggering number of taxes for very little benefit and the slightest increase to this burden would finish off the rest barely hanging on.
President of the Lagos Chamber Of Commerce and Industry (LCCI), Michael Olawale-Cole, in a recent state of the nation address, said manufacturing outlook has remained subdued and discouraging due to high inflation, continuous rise in interest rates, forex scarcity, high energy cost and weakening purchasing power, which is weighing down the sector as well as manufacturers.
Urging the Federal Government to sustain targeted interventions in manufacturing and export, he said manufacturers should be assisted with subsidised input and more allocation of forex for importation of critical inputs, while the Central Bank provides targeted concessionary credit to the OPSN.
Following uncertainties in the economy, especially towards the end of last year, the MAN said the sector recorded huge investment decline, which negatively affected industry players.
Presenting its summary of findings of the manufacturing sector for the second half of last year, Ajayi-Kadir disclosed that activities in the manufacturing sector suffered a sharp decline due to high cost of energy, the ongoing Russian-Ukrainian war, Naira redesign policy, acute forex shortage for importation of raw materials and machines, high cost of borrowing among many other factors.
The sector, which plays key a role in stabilising the economy, recorded declining capacity utilisation, deteriorating to 54.9 per cent from 59 per cent recorded in the corresponding half of 2021; indicating a 4.1 percentage points decline in the second half of 2022.
According to MAN, quarter-on-quarter, the sector declined by three percentage points when compared with 57.9 per cent recorded in the first half of the year, adding that manufacturing capacity utilisation averaged 56.4 per cent in 2022 as against 55.9 percent average of 2021.
Ajayi-Kadir noted that the manufacturing sector factory output value declined to N2.68 trillion in the second half of 2022 from N3.73 trillion recorded in the corresponding half of 2021, a 28 per cent decline. The sector also declined N1.31 trillion (32 per cent) compared with N3.99 trillion recorded in the preceding half. He added that the value of manufacturing production totaled N6.67 trillion in 2022 as against N7.39 trillion recorded in 2021.
Noting that manufacturing production was severely affected in the second half of last year by the absence of implementation of new capital projects by the government as it focused on the elections, he said production in the sector was also negatively affected by limited purchases due to the Naira redesign policy, high inflationary pressure in the country, high energy costs and acute forex shortage.
He added that the issues of the basic metal group, whereby duty of annealed cold roll was reduced to five per cent from 45 per cent, suspension of motorcycles in some areas across states, increase in the duty of paper from five to 20 per cent and so on, contributed to the dip in the production of the sector in the period under review.
Annealing is the process of relieving the internal stresses in the steel that was built up during the cold rolling process. Manufacturing sector local raw materials sourcing increased to 53.5 per cent in the second half of 2022 from 50 per cent recorded in the corresponding half of 2021. Also, he said, local raw materials utilisation in the sector averaged 52.8 per in 2022 as against 51.5 per cent recorded in 2021. The increase in local raw materials utilisation in the sector during the period, according to him was due to increased difficulty in sourcing forex, compelling manufacturers to look inwards for raw materials, notwithstanding the associated huge costs.
Revealing that the development and production of Active Pharmaceutical Ingredients (APIs) has continuously declined due to limited funding of the Raw Materials Research and Development Council (RMRDC) by the Federal Government, he said the absence of local production of APIs has had dire consequences on pharmaceutical production.
Meanwhile, the inventory of unsold finished products in the manufacturing sector increased to N282.56 billion in the second half of 2022, up from N169.75 billion recorded in the corresponding half of 2021. It also increased by N85.46 billion (51 per cent) when compared with N187.1 billion recorded in the first half of the year.
Inventory of unsold goods in the sector totaled N469.66 billion in 2022 as against N384.58 billion recorded two years ago, mainly due to declining income of households. Also, manufacturing sector investment dipped to N145.59 billion in the second half of 2022 down from N160.88 billion recorded in the corresponding half of 2021; a 10 per cent decline. It further declined by 18 per cent, when compared with N178.39 billion recorded in the first half of the year. Manufacturing investment totaled N323.98 billion, last year, as against N305.02 billion recorded in 2021, caused by the high debt profile of the Federal Government, which deters foreign investment, high cost of borrowing and energy as well as low consumption.
Based on the association’s survey since 2013, cumulative manufacturing employment was estimated at 1,686,725 at the end of 2022. However, in the second half of last year, manufacturing employment dipped to 6,741, down from 8,508 and 9,559 recorded in the corresponding half of 2021 and the first half of 2022 respectively. The decline in the number of jobs created in the sector he said, corroborates the poor operating business environment that was perverse with high energy cost, exorbitant cost of borrowing, high inflation and low sales.
He went on to reveal that electricity supply to industries from the national grid declined marginally to 11 hours daily from 12 hours, recorded in the preceding half. Consequently, expenditure of alternative energy source increased to N76.7 billion in the second half of 2022 from N45.04 billion recorded in the corresponding half of 2021; thus, indicating a whooping 70 per cent increase. The expenditure was incurred on procurement of diesel, gas, generators and spare parts, inverters and uninterruptible power supply or uninterruptible power source (UPS).
He added that the average lending rate from commercial banks slowed to 22 per cent from 24 per cent recorded in the corresponding half of 2021 and first half of 2022 respectively. In the last quarter of 2022, Monetary Policy Rate (MPR) stood at 16.5 per cent; Cash Reserve Requirement (CRR) was 32.5 per cent; and Liquidity Ratio (LR) 30 per cent.
He further stated that the effect of the ongoing Russia/Ukraine war on the Nigerian economy was quick, as the cost of wheat and other food inputs increased; prices of fuels, particularly diesel, rose by over 50 per cent; cost of transportation logistics, including shipping, escalated, even as the effect of COVID-19 is yet to fully die down.
Proffering solutions, he urged the Federal Government to prioritise forex intervention through the official market, particularly to support raw materials and machine needs of the industries, improve forex allocation to the industrial sector and enhance the capacity of designated banks to efficiently process application of forex by manufacturers, grant concessional forex allocation at the official forex market to industries for importation of productive inputs not locally available and unify the various forex windows in the country.
He also asked government to develop and implement a roadmap for improved power supply, focusing on off-grid solutions and independent power projects by the private sector to ensure adequate supply of energy for production; invest in the electricity value chain and commit to adding 10000MW to the current electricity distributed in the country; embrace and support significant development of energy mix and renewable; commission the resuscitation of the existing national refineries to produce fuels locally; review gas price for domestic consumption to be in tandem with the export price; promote energy efficiency and renewable energy deployment; incentivise more investment in gas aggregation to end gas flaring and optimise crude oil production based on Organisation of the Petroleum Exporting Countries (OPEC) quota and gas production to ramp up revenue.
MAN also demanded incentivising investment in local development of raw materials by giving attention to domestic production of API and basic chemicals; refocus on backward integration and resource-based industrialisation; reverse the duty for annealed cold roll back to 45 per cent and reinvigorate the backward integration policy through the use of local resources to provide raw materials to industries.
He further asked that the list of approved, harmonised taxes and levies for the manufacturing sector by the Joint Tax Board (JTB) to address the issues of multiples taxes and levies be published; implementation of said harmonised taxes/levies project to be monitored and enforced by the JTB should commence and the increase in excise duties should be jettisoned. In addition, he urged the development of a comprehensive and integrated framework that will facilitate the intentional movement of operators in the informal sector to the formal sector; widening of the tax net rather than increasing the tax burden of existing tax payers and full implementation the Steve Oronsanye Report on the reduction and re-alignment of Government Agencies and Parastatals in order to streamline the number of taxes, levies, fees and administrative charges.
On infrastructure, the MAN called for investment in transport sector to mitigate the high cost of transport; significant investment in the ports infrastructure; resuscitate the moribund rail tracks leading from the ports to industrials areas; harmonious working relationship between all government agencies operating at the ports; implementation of a single window platform to eliminate significant human inference in the ports clearing system and improving the time taken to clear machines and raw-materials at the ports while making link roads accessible.
Speaking on funding, he demanded the setting up of a monitoring and evaluation platform with private sector representatives to oversee the disbursement of the various development funds meant for the industries; providing credit guarantee for industrial loans from commercial banks, the creation of development funding windows for SMEs with liberal conditionality and the strengthening of the Bank of Industry (BoI) and Bank of Agriculture (BoA) to adequately provide liberal finance for the manufacturing sector.
The MAN further demanded that government allows all industrial policies gestate with proper monitoring and evaluation rather than jettisoning or altering them frequently, as well as strengthen the implementation of the Executive Order 003 and 005.
Government should develop and implement a roadmap for improved power supply, focusing on off-grid solutions and independent power projects by the private sector to ensure adequate supply of energy for production; invest in the electricity value chain and commit to adding 10000MW to the current electricity distributed in the country; embrace and support significant development of energy mix and renewable; commission the resuscitation of the existing national refineries to produce fuels locally; review gas price for domestic consumption to be in tandem with the export price; promote energy efficiency and renewable energy deployment; incentivise more investment in gas aggregation to end gas flaring and optimise crude oil production based on Organisation of the Petroleum Exporting Countries (OPEC) quota and gas production to ramp up revenue.