Saving the food and beverage industry

Since the slide in oil price in the international market and its expected effect on the economy, attention has focused on the manufacturing sector, especially the food and beverage segment.

This is understandable as the sector, ordinarily receives any internal or external direct shock on the economy. Nigeria heavily relies on oil for its revenue for up to 90 percent of its total revenue. The price of Brent crude oil which Nigeria produces dropped from $115 per barrel in June to $68.62, at end of November.

To augment the revenue following the continued slide in the oil price due to various factors, including glut in the market by OPEC countries, low demand of the product in international market and oil boom in China and US, two heavy buyers, government has proposed increase in VAT from the current 5 percent to 10 percent.

Assessing the impact of this proposed VAT increase on the manufacturing sector, the players in the food and beverage industry in Nigeria swiftly expressed shock and serious concern on the proposed increase. “This fiscal policy change if carried out will bring us back to pre-democracy days where taxes, duties and levies were imposed without consultation and consideration for the consequences on industrial growth and the well-being of the society,” according to stakeholders.

When the increase happens, manufacturers may respond with certain measures such as cutting jobs and raising prices of goods in order to remain in business.

Again, manufacturers fear that by charging higher prices for products, resulting from higher production costs, the demand by consumers for goods could fall in the market. And once demand falls in the face of a huge cost burden, the manufacturer is likely to seek ways of cutting costs and the immediate one is reduction in the number of workers and cut in marketing budgets.

The current estimated contribution of food and beverage industry in terms corporate tax and VAT is approximately N40 billion per annum, while the market capitalisation of top 10 listed companies in the food industry is also estimated at N2.8 trillion. Both direct and indirect employment in the sector is also put at over 2 million and the augment is that if the VAT is increased it will affect employment figure.

Need For Due Process In Policy Formulation

The manufactures believe that for sound and sustainable policy formulation, stakeholders must have the opportunity of knowing what is going to change and make contributions to such proposal so that full benefits would be derived. This was not so about VAT but information is rife that government will review VAT, it said.

It reminded government that the Food and Beverage industry is represented by the Manufacturers Association of Nigeria (MAN) on the Tariff Technical Committee of Federal Ministry of Finance for ensuring that changes don’t come as surprises or disrupt operations.

The body said a sound economic policy ought to be formulated with a view to balance the drive for increase in government revenue from taxes with the need to encourage national productivity and manufacturing which adds value to the economy and generates revenue for government in a sustainable manner. It must also achieve the ideal of growth in the primary and secondary production of food in agric and manufacturing sectors.

It is also the concern of manufacturers that the proposed fiscal policy change deviates from the intention of encouraging local production, as the Federal Government policy enunciation had consistently emphasised that it would encourage the real sector of the economy by allowing the private sector and indeed the manufacturing sector to be the lever of growth for the Nigerian economy.

According to the body, basic food and beverage products like biscuits, confectionery, water and carbonated drinks are basic food items that are within the reach of the masses of this country. They are considered to be easy source of immediate energy and are nutritiously enriched with quick source of vitamin for the teeming population. Food security cannot be achieved without the food and beverage products.

“Any increase in the prices of these products will therefore be a direct increase in the cost of these products which are easily affordable; this would spiral inflation with consequent hardship for the average Nigerian thereby further diminishing the quality of life. Note that these fast moving consumer goods are the determinants of inflation to a common man, increases in their prices drive a higher consumer index”.

It also reminded the government that the disposable income of an average Nigerian is already overburdened.

Therefore, government should not implement policies which would further increase hardship. In the same vein, increase in prices of easily affordable food products in the face of seriously depleted disposable income will elicit resistance to the products by consumers and therefore lead to reduced capacity of the manufacturers. This in turn will lead to loss of jobs in industries and loss of revenue to government.

“We reckon that government does not wish to create jobs in the primary sector (agriculture) and lose the jobs that have been created in the secondary sector (manufacturing). The new investments and foreign direct investment in the food industry have given Nigerian economy a boost. This is clearly shown in the rebased GDP.

Government can actually encourage the two sectors to grow without killing one for the other. Government could not want to increase revenue in one sector and lose revenue in another sector; rather it should increase revenue from both sectors”.

Suggestion
Instead of the increase in VAT, the manufacturers who account for 40 percent of the Nigerian manufacturing industry output – estimated at N3.5 trillion would prefer broadening of tax or ensuring tax inclusiveness. There are a lot of firms and individuals who are not paying tax or whose taxes are illegally collected by spurious agents. It believes that if government would harness from those firms and individuals who are dodging tax and ensure that all tax illegally collected by agents come into government purse, it would boost government revenue, not only in the short term, but long term.