Fiscal stability: Critical priorities for Nigeria

If new insights emerging from reliable sources close to the Fiscal Policy Reform Committee are anything to go by, the Federal Government may have rescinded the decision to further increase excise duties in the much-awaited Fiscal Policy Measures and Tariffs Amendments as part of the 2023 Finance Appropriation Bill.  The discourse on the potential increase in excise duties has generated considerable concerns in recent weeks. This is understandable given that the current roadmap only took effect in June 2022. For the record, the 2022 Fiscal Policy Measures released in March this year, already outlined the excise rates for beverages and tobacco products covering a 3-year period from 2022 to 2024. In the 90-day moratorium between the pronouncement and implementation, players in the sectors who are major and longstanding investors in the manufacturing industry made significant alterations to their short and medium-term investment commitments. The effects of these disruptions are telling.

In the face of biting financial constraints amongst other sector-specific challenges, the current outlook of the beverage sector especially in the second half of 2022 continues to send shock waves to stakeholders in the value chain and the larger investment community. This is why there was an uproar following the credible indications of a further increase in excise in 2023 and 2024, by as much as 100% in some cases, and a departure from the already established roadmap. Furthermore, this is coming within a few months after the 2022 FPM took effect.  The implications are dire: a classic case of policy inconsistency, with the potential to cause distrust in the economy, investors’ wariness and upend planned private investments.

None of the consequences of the proposed excise increase is positive. What indicators informed this policy consideration? Did such indicators factor into the real socio-economic dynamics? Is the decision more likely to further drive or inhibit growth in the sector? These are pressing questions.

A burdened sector striving for a rebound

From a business standpoint, the proposal could precipitate further challenges in an already volatile business environment. Beyond the paucity of foreign exchange, trade and import restrictions, multiple taxes, chaotic power situation, inflation (21.09% as of October), food inflation (23.72% as of October), there are other severe socio-economic indicators. Data show that while the total tax contribution of the industry grew year on year in 2021 by 28%, the expectation for 2022 is 10% based on sector performance from January to September. This shows a significant decline, a pattern also seen in the record of revenue generated from excise duties. While revenue duties in the sector grew year-on-year by 12% in 2021, it is set to grow by a marginal 5% in 2022. This data clearly buttresses the point that was made earlier – the industry is slowing down, contrary to indications in some quarters. It is clear that further tax increases within a short period of time will be tending towards sub-optimality, with a negative impact on the government and the overall economy.

As it stands, the deficit for the 2023 budget is N10.78 trillion. While the government has indicated that the deficit would be bridged by external borrowing (totalling N8.80 trillion), it is understandable that the proposed excise increase is a calculated attempt to shore up revenue to fund the 2023 appropriation bill. However, this is only possible when the industry has moved beyond a fragile recovery for the excise increase to move the needle in this regard. It is in this unidirectional approach that the proposal falls short, as it did not appreciate the impact on investor confidence (which is at a subpar level considering the already perceived volatility of the market) and the persistent negative outlook of the industry until a marginal rebound in 2021. Perhaps, a little reduction in expenditure and budget deficit to reduce the debt burden.

Tax, purchasing power and support for better consumer decisions

One of the assumptions that may have informed the proposal for a further increase in excise could be that beverage products are inelastic and costs can be passed on to consumers. However, the reality is that the manufacturing industry has recorded over 25% increased costs of doing business, a high cost of finance, with an almost 400% hike in the cost of diesel between January and September 2022. Traditionally, surveys show the elasticity of demand for basic consumer goods and the propensity for replacement with illicit, smuggled and cheaper alternatives when prices are beyond the reach of consumers. The recommendation by World Bank to Nigeria to increase pro-health excise rates on alcohol, tobacco, and sugary drinks, to bring them in line with international standards can be quite dicey: Health (sin) tax in an economy where citizens still bear the majority of their health costs is tantamount to double taxation. This is because any increase in taxes in isolation of other critical steps like educational campaigns, support for recovering alcoholics and enforcement of age limits can be counterproductive. Therefore, the Nigerian government needs to consider what is feasible and attainable per time in the best interest of the economy.

While some international institutions may have indicated that health taxes in Nigeria is one of the lowest in Africa, significant hikes in some countries such as Ghana, Uganda, Cote D’Ivoire and Burkina Faso resulted in massive job losses, a significant drop in export, a decline in sales and excise taxes and resort to illicit and unhealthy alternatives. In reality, studies show that predictable, modest and sustained increases in excise over time have been the most significant success factors for increased government revenue, not rapid and unpredictable increases.

If consumers cannot afford their favourite beverages, demand will be impacted severely and production levels decreased. The value chain would be disrupted in one fell swoop. The beverage industry made a contribution of $2.3 billion to the Gross Domestic Product (GDP) and accounted for $526.2 million of the government revenue in 2019 because, despite the instability, purchasing power was relatively fair, the world was not reeling from a post-covid recession and Russia had not started a war with Ukraine. Considering the current state of affairs and the increased burden of the proposed increase, the numbers are very likely to significantly diminish. The stakes are too high.

Adopting creative approaches to revenue generation

What the country needs is a more creative and realistic path to revenue generation. This point bears reiterating. It should be stressed that there is an urgent need to reduce the huge tax compliance gap in Nigeria. Reports have indicated that the ratio of non-oil tax revenue in Nigeria is below 10%, a situation worse than the average for most developing countries. Focus on closing the tax compliance gap would guarantee increased government revenue by a significant proportion by enabling the collection of more accurate accruals and steadily easing the fiscal burdens. In the same vein, similar efforts should be channelled to widen the tax base by leveraging technology; which can further be expedited through tax incentives.

Still, other issues arise. The record of economic growth has, for the most part, always been at the intersection of the state and the market. The realities in more developed climes are evidence enough to support this assertion, even though an argument can be made that these are societies where the state has significant capacity. For a developing economy like ours, the issues go even further to the challenge of how to consistently encourage private investment in various sectors of the economy. The trick around this challenge is simple and straightforward: create and sustain an environment that is investment-friendly; one that supports the private sector at an optimum level, which is an integral part of any government’s ambition to grow the economy and create jobs. This is one reason the narrative about public-private partnerships would always remain relevant, particularly in the face of dire economic realities.

Speaking about jobs, this is a concern that remains a priority. The current unemployment rate is put at 33%. Over 80% of work is in the informal sector. There are opportunities for the formal sector, particularly in manufacturing, to increase its capacity to absorb more workforce, and subsequently reduce the high rate of unemployment.  Many of the players in the beverage sector are legacy brands, some having been around for more than seven decades. Through the years, they have shown what is possible with adequate support in the creation of jobs. Already, as reports show, the players in the sector create more than 300,000 direct and indirect jobs. This indicates there is potential for the formal sector, with commensurate benefits to the government. More jobs in the formal sector mean increased income taxes accruable to the government, and a reduced need to consistently resort to borrowing to make up for fiscal deficits.

Engagement, engagement, engagement

In the face of biting fiscal constraints, such as the situation we find ourselves in, a major consideration should be more active engagement with the organised private sector. What currently obtains needs to be deepened. Roundtables with the players in the sector should not be merely an attempt at keeping up with routines or institutional niceties, but such engagements should be guided by the principle to truly understand the pain points of the sector and how the government can, in the immediate, address the issues to increase productivity, and in the long term, address challenges related to the ease of doing business to bolster investor confidence.

The dire business experience of local manufacturers in the beverage industry in Angola, Kenya and South Africa is telling. A major takeout from the experience is a consideration of proposals from stakeholders in the industry whose businesses contribute immensely to the economy. The players in the beer sector, for example, have proven to be such stakeholders. As a result, even though recommendations from institutions like the World Bank may be well intended, the Federal Government needs to take the best position in light of its unique socio-economic realities. In this connection, the days ahead present an opportunity for a critical review of the government’s approach to engagement with the private sector. The private sector cannot be seen as a competition or harboured as a necessary evil but engaged as a major partner in economic recovery and sustainable growth.

Oshobi, a development economist and author, wrote in from Lagos