Saving the food and beverage industry

Since the slide in oil prices 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 relies on oil for up to 90 percent of its total revenue.

To augment, government has proposed increase in VAT (Value Added Tax) from the current 5 percent to 10 percent. But players in the food and beverage segment of the nation’s manufacturing industry are concerned that the proposed VAT increase would have negative impact on the sector. According to them, 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, which would likely lead to a slide in demand. And once demand falls in the face of a huge cost burden, the manufacturer is likely to seek further ways of cutting costs, and the cycle goes on.

The current estimated contribution of food and beverage industry in terms of 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 put at over 2 million and the argument is that if VAT is increased, it would affect the employment figure.

This move will likely worsen the plight of manufacturers who have been hard hit by high cost of energy, multiplicity of charges by numberless government agencies, poor infrastructure, high port charges and harsh business environment. Worse still, it will further drive up production costs which are already soaring higher owing to devaluation and blockades placed on manufacturers’ road to the Retail Dutch Auction Scheme by the CBN. It also has the capacity to reduce the competitiveness of these manufacturers in both local and international markets.

We believe, just as the stakeholders have pointed out, that a sound economic policy ought to be formulated with a view to balancing 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.

“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,” the stakeholders said.

Indeed, players in the food, beverage and tobacco sector have made significant investments and raised their capacity. The most recent data from MAN show that players in this sector made total investments of N82.47 billion by end of 2013 even as capacity utilisation rose to 61.5 percent in the second half of 2013, from 53.5 percent reported in the first half of the same year.

The Federal Government has 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. We therefore believe that rather than increasing VAT, government could consider broadening the tax net or ensuring tax inclusiveness. There are many firms and individuals currently outside the tax net or whose taxes are illegally collected by spurious agents. Bringing those firms and individuals into the tax net will boost government revenue, not only in the short term but also in the long term.