Sugar tax, FX scarcity hit food businesses in Nigeria

Food and beverage companies in Nigeria have been hard hit by the recent implementation of the N10 per litre sugar tax, foreign exchange scarcity, and high energy prices.

The food, beverage and tobacco subsector of the manufacturing sector shrank in the third quarter of this year for the first time in 27 months, according to the National Bureau of Statistics.

Experts say the high inflation in Africa’s biggest economy weakened demand in the subsector, one of the top three contributors to manufacturing GDP.

The subsector contracted by 4.05 percent in the third quarter of 2022, compared to a growth rate of 5.11 percent in the previous quarter.

Production was strongly hampered by lack of foreign exchange for importation of raw materials that are not available in the country in all the sectoral groups, safe for the food subsector, which has seen a significant level of backward integration, the Manufacturers Association of Nigeria (MAN) said in a recent report.

“However, the N10 increase of excise duty on non-alcoholic drinks grossly affected production in that segment of the sector. In addition, the implementation of migration of National List to Chapter 99 of ECOWAS Common External Tariff is perverse with bureaucracy and complexities among government agencies, leading to delay in getting raw materials to factories,” MAN said.

Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise, said the contraction in the food and beverage subsector is one of the most shocking things in the Q3 GDP report.

“The food and beverage sector is the flagship of the Nigerian manufacturing sector. For several decades, it was the toast of investors in the stock market. It contributed N2.2 trillion to GDP in Q3,” he said.

Yusuf added this development is a reflection of a major setback for the manufacturing sector which calls for an emergency response by the government.

Since the beginning of this year, inflation in the country has been on the increase as a result of the foreign exchange liquidity challenges and the high cost of diesel caused by the Russia-Ukraine crisis.

According to the NBS, the inflation rate accelerated to 21.09 percent in October from 20.77 in the previous month, while food inflation surged for the eighth straight month to 23.72 percent.

Diesel price rose by 178.1 percent to N801.1 per litre in October from N288.1 per litre in January. While the naira-dollar exchange rate at the official market closed at N445/$1 last month from N414/$1 in December 2021. At the parallel market, the naira fell to a record low of 740/$1 last month from 580/$1 in December 2021.

These economic headwinds led to an increase in the retail price of non-alcoholic drinks such as Coca-Cola, Fanta and Pepsi to N200 per 50cl bottle from N100 last year.

“Last year, business was good for us but this year, it is opposite because of the price increase,” said Ibrahim Ahmed, an inventory manager at Coca-Cola Nigeria. “Demand has dropped to as low as 20 percent compared to last year.”

Read also: ‘Why proposed 20% excise tax on non-alcoholic beverages, others is harsh, dangerous‘

In 2021, soft drinks sales increased by 100 percent to $1.4 billion from $713.6 million in 2016, according to Euromonitor International.

In November, the carbonated soft drinks sub-sector of MAN raised an alarm over the Federal Government’s proposed 20 percent Ad-valorem excise tax on non-alcoholic beverages.

During a press briefing in Lagos, the group said the additional 20 percent would not only kill the sector but result in the loss of revenue by the Federal Government, and loss of jobs by various layers of the Nigerian workforce.

“Such a move will spell doom for the sector as the effect of the prevailing N10 per litre tax regime is already crippling the sector with its biting effects on their businesses,” it said.

Victor Ikem, a Lagos-based wine retailer, told BusinessDay that additional burden would be passed on to consumers, and this would automatically slow down production and investments in the sector.