Energy cost, others, start 2022 on bleak note for manufacturers

The first quarter of 2022, which should determine the pace of the year for businesses, kicked off on a grim note for manufacturers which may result in a bleak business year if corrective steps are not taken.

Despite numerous objections and pleas by manufacturers and the organized private sector (OPS), the FG through Zainab Ahmed, Minister of Finance in January directed that an excise duty of N10 per litre be imposed on all non-alcoholic, carbonated and sweetened beverages. This was to discourage excessive consumption of sugar in beverages and raise revenues for health-related and other critical expenditures.

Alfred Olajide, managing director at Coca-Cola Nigeria, said at a virtual fiscal policy dialogue held recently that the excise duty of N10 per litre on all non-alcoholic, carbonated and sweetened beverages would be detrimental to the growth and development of the soft drinks industry.

He added that the excise tax being a production tax makes it worse for them as it is not based on what is sold but what is produced which is a lot of burden at this critical time when industries need to be protected and supported to bounce back.

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“Already, the food and beverage sector contributed over N200 billion value added tax, almost N400 billion in corporate income taxes in the last five years, and more than N100 billion in import duty in the last three years, yet we continue to grapple with the exponential increase in costs and limited ability to pass it to the consumers, who are also under pressure,” he said.

Segun Ajayi-Kadir, Director General, Manufacturers association of Nigeria (MAN) said in a statement that this directive may likely cause a 0.43 percent contraction in output and about a 40 percent drop in total industry revenues in the next five years as activities and players in the affected sub-sector are bruised.

Consequently, rather than the estimated revenue increase of N4.8 trillion, he said the directive will cause the beverage sub-sector to lose up to N1.9 trillion in sales revenue between 2022 -2025.

“The government is estimated to generate an excise tax of N81 billion between 2022 and 2025 from the group, this will not be sufficient to compensate the corresponding government’s revenue losses in other taxes from the Group,” he said.

High electricity cost without correlating provision of power as well as cost incurred from self-generating power has been a problem for local manufacturers over the years.

Despite being able to generate 12,522 megawatts (MW) of electric power from existing plants, Nigeria can only supply and distribute around 4,000MW of electricity according to the United States Agency for International Development (USAID).

Yet, Nigeria was ranked 169 in the getting electricity metric, scoring 47.4 points on the World Bank’s ease of doing business 2020 report and a zero in the reliability of power supply, hence local manufacturers are left to self-generate more than 8,000MW through alternative sources of energy in order to stay afloat.

Unfortunately, following the infiltration of adulterated fuel in the country and the ongoing crisis between Russia and Ukraine, manufacturers are battling with a 23 percent increase in fuel cost and heightened scarcity as well as 92 percent sudden hike in the price of diesel, both of which are quite instrumental to the production process.

This caused a surge in their energy and production cost leaving them confused and causing the production process to drag. Already some of them are reducing their production quota while others are looking at a possible increase in the prices of their products.

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According to the Manufacturers Association of Nigeria (MAN), the cost of alternative electricity generation alone constitutes about 40 percent of production cost In H1 2020, expenditure on alternative energy was N24.16 billion as manufacturers spent N9.45 billion on diesel; N8.64 billion on Gas; N3.04 billion on Generator; and N3.03 billion on other sources and accessories such as inverter, UPS.

Furthermore, in 2020 manufacturers spent N81.91 billion providing alternative energy which was a 33 percent increase to the N61.38 billion expended in 2019. Although no official data has been provided for 2021, market realities show that the cost of proving alternative energy significantly increased too.

Frank Onyebu, chairman, MAN, Apapa branch said that the astronomical hike in the price of diesel could be the proverbial last straw for struggling manufacturers who have long been burdened with energy costs.

“The high and increasing cost of diesel is escalating an already difficult situation for businesses, there will be a surge in production and operating costs, erosion of profit margins and a risk to business continuity,” he said.

In the second quarter of 2021, manufacturers’ production and distribution costs increased by 21 percent which caused a 29 percent decline in the volume of production. With this trend, there are projections that this may repeat itself perhaps more drastically during this period.

In Africa’s largest economy, oil proceeds account for over 50 percent of government revenues and 95 percent of foreign exchange earnings, consequently not enough dollars is available for manufacturers to import vital raw materials, machines and resources that are not available locally.

Manufacturing CEOs complained that as at the fourth quarter of 2021, that the rate at which FX is sourced and accessed has not improved adding that the unavailability of FX has negatively impacted the sector’s performance.

Foreign exchange shortages have been an ongoing challenge in Nigeria and led to the death of 54 manufacturing firms in 2016 alone. Many more have followed since then with manufacturers saying they get two to 10 percent of their dollar needs from the market even after waiting for 30-90 days.

This is worsened by the continuous devaluation of the Naira, currently it costs N416 to get one dollar from the Central Bank of Nigeria (CBN), while it costs no less than N550 in the parallel market.

Mansur Ahmed, MAN President, told BusinessDay recently that capacity utilization and productivity in the sector has been constrained due to issues around FOREX availability and affordability.

“Significant amount of FOREX is not available for use and on average over 40 percent of manufacturers cannot get the funds they require to give their operations a full capacity,” Mansur said.

According to economic experts, as a crucial component of the economy industries in Nigeria need to be protected seeing that they are susceptible to shocks and are struggling to survive in a weak and unfriendly business environment.

In addition, if these core issues are not immediately addressed it will metamorphose into a bigger issue which will have impact on economic growth, employment, product availability, among other issues.

“This is just the first quarter of the year, some companies are still trying to sort out other issues, and are looking at possible ways to improve their profit while they manage their production cost and other leakages, issues such as this will temporarily destabilize them,” Jide Babatope, Lagos-based analyst said.

Babatope told BusinessDay that although the sector is made up of resilient players, the government needs to take prompt action in addressing its numerous challenges so as to prevent a possible collapse.

“The sector is in dire need of policy and project reforms across its sub-sectors, vulnerable sub-sectors in the manufacturing space should be provided funds at a low cost to sustain operations and encourage CAPEX spending. In addition, solving the FX challenges faced by these manufacturers would be an important factor to kick-start growth,” Nwani said.