Nigeria: What 2022 Budget Proposal Has for Manufacturers

12 October 2021

The operators in the Nigerian manufacturing sector and leaders of the organized private sector believed that the 2022 proposed budget came with doses of highs and lows.

Win some, lose some. This is an apt description of what the proposed 2022 budget offered to manufacturers and other players in the real sector of the Nigerian economy. Some operators in this sector believed that what the budget gave with one hand, it took away with the other hand. According to them, the increased capital project would enhance infrastructure provision that would encourage manufacturing while the huge budget deficit meant more taxations and levies on manufacturers and other businesses.

The budget, as proposed by President Muhammadu Buhari, and presented to the National Assembly on Thursday, October 7, contained N16.39 trillion expenditure plan, which is 25 percent higher than the 2021 budget estimate.

The budget's core assumptions are as follows: Oil price benchmark of $57 per barrel; Oil production of 1.88 million barrels per day; Exchange rate of N410.15 per dollar; GDP growth rate of 4.2 percent and inflation rate of 13 per cent.

For the Director General of the Manufacturers Association of Nigeria (MAN) Mr. Segun Ajayi-Kadir, who reviewed the proposed budget from the manufacturers' perspectives, said that it came with very few highs and a number of lows.

The highs, according to Ajayi-Kadir, include the proposed capital expenditure of N5.35 trillion, which resonated well with the MAN's cry for the need to prioritise infrastructure development that would lay the foundation for Nigeria's sustainable economic development.

He said: "In summary, the highs principally center around the proposed aggregate capital expenditure of N5.35 trillion is 32.64 per cent of the total expenditure as against the N4.37 trillion and 32.2 per cent respectively of 2021 budget.

"This means that the sum allotted to capital expenditure will increase appreciably in 2022, particularly for the building materials and construction segment that have higher multiplier effects on the manufacturing sector.

"No doubt, this buttresses the fact that government intends to continue to upscale the development of infrastructure across the country. This is a development that MAN considers laudable, because it resonates with our annual advocacy submission to the Government on the need to prioritize infrastructure development for sustainable economic growth. It will also increase production in the real sector of the economy."

Nevertheless, the director general of MAN also observed that the budget as proposed has its lows that would have a telling effect on the manufacturing sector.

He identified the top three low points of the proposed 2022 budget as the proposed excise duty on carbonated drinks; the likelihood of increased drive for collection of taxes and levies, which might entrench multiple taxation and untoward means of collection all in the bid to increase non-oil revenue generation that would cover the deficit side of the proposed budget, and thirdly, the suspicion that the highly ambitious assumption of 13 per cent inflation rate in the budget might not hold water, especially when the prevailing inflation rate as at August 2021 stood at 17.01 per cent.

Ajayi-Kadir said: "The proposed excise duty on carbonated drinks means further strangulation of the manufacturing sector that is already burdened with multiplicity of taxes/levies and fees. The industries operating in this segment are already operating with extremely low margins, so the planned excise will push most of them over the edge. We risk an unprecedented buildup of unplanned inventory, downsizing of labour force and factory closures. All these would vitiate the revenue expectations of governments and therefore counterproductive."

He argued further that the increased drive for collection of taxes and levies would border mostly on multiplicity of taxes and untoward means of collecting them.

He said: "The current unbridled avalanche of taxes, fees and levies from the three tiers of government and their overzealous regulatory agencies may be compounded. Most often this worrisome scenarios is contrasted with little attention to supporting infrastructure and facilitation of the productive sector."

He added that "the highly ambitious assumption of 13 per cent inflation rate, when the prevailing rate as at August 2021 stood at 17.01 per cent and government is yet to address the incessant crises between the herdsmen and famers and other insecurity conditions that contributes significantly to food scarcity that evidently fuel inflation in the country."

The director general said that government shuld make deliberate effort to facilitate reforms that would reduce the high recurrent expenditures of government.

The MAN also stated that apart from the envisaged impact of budgetary allocations on the manufacturing sector, there is equally the need to support the implementation of the proposed budget with a more production centric monetary policy that would crash interest rate to guarantee positive results for manufacturers and the economy in general.

He pointed out that "the transmission mechanism of seamless access to long term funds at affordable rate will naturally guarantee expansion in manufacturing investment; ensure full utilisation of idle capacities, increase capacity utilisation, upscale manufacturing output and improve its contribution to the gross domestic product (GDP)."

The MAN also expected that the government would give priority consideration to the following measures while it awaits the breakdown and the appropriation of the proposed budget.

The manufacturers' association, therefore, called for "full and timeous implementation of the budget, when passed, to stimulate the much-needed growth." It also expected deliberate actions and measures that would stimulate "production through improved government patronage of made in Nigeria products, being the largest spender in the economy."

It also demanded for policy directives that would ensure a synergy between monetary and fiscal policy to guarantee better economic performance and inclusive growth.

Ajayi-Kadir also asked government to give attention to the following items of concern to the operators of the real sector of the economy.

These, according to him, include the need to "prioritise the allocation of foreign exchange to the manufacturing sector for the importation of vital raw materials, machine and spares that are not available locally; prioritise the utilisation of locally produced construction materials in the current/ongoing upgrade of infrastructure across the country; complement the current trend and performance of vital macroeconomic indicators with deliberate effort at taming inflation to maintain price stability in order to meet the expectations of the proposed budget."

Others areas of attention, according to MAN, also include the initiation of "additional tax reforms and tax administration measures that will widen the tax net to compel the non-tax-paying individuals/firms operating to pay tax and thereby increase tax revenue.

"Reduce government recurrent expenditures to cut fiscal deficit, borrowings and associated service charges and the redoubling of efforts at addressing the insecurity situation in the country to improve food production and supply and ensure unfettered business activities. This will facilitate the attainment of the envisaged economic growth."

The manufacturers stated that the above recommendations rested principally "on our firm believe that the intentions and provisions of the proposed budget alone cannot guarantee success. In order to make sufficient and significant impact on the economy, they must be matched by supporting and complimentary policies, effective and timeous implementation, and regular monitoring and performance evaluation."

Speaking in the same vein, the Founder and Chief Executive Officer of the Centre for Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, urged the federal government to refrain from imposing new excise duties on the manufacturing sector. The sector, according to Yusuf, is currently grappling with too many macroeconomic and structural challenges already.

He also observed that the assumptions the proposed budget was based on were generally realistic but for the exchange rate and oil output assumptions, which did not reflect the current realities on ground.

He observed that the major worry around the 2022 budget would be fiscal sustainability, especially in the context of recent trends of weak revenue performance that had consistently fallen significantly below targets.

"The 2022 fiscal year would be characterised by high risk that the deficit might exceed the budgeted threshold, debt sustainability challenge, retention of fuel subsidy, mounting recurrent expenditure and the continuation of central bank's financing of fiscal deficit, which has serious consequences for inflation because of the profound impact on money supply grow.

"The way forward for the economy in the light of the budget rigidities is to ensure that the security problems are fixed to create the environment for increased real sector activities; review the foreign exchange policy regime to reduce distortions, eliminate arbitrage opportunities, minimise uncertainties, reduce exchange rate volatility and mitigate investment risks and aligning the CBN financing of deficit strictly to the provisions of the CBN Act," Yusuf said, adding that the government should demonstrate the political will to deal with the crisis at the Lagos ports.

1. Looking at the FGN's revenue performance, as of 30th Jun 2021, FGN's retained revenue was N2.23 trillion (67% of the N3.99 trillion pro-rated budget). The shortfall of 33% is attributable to the underperformance of both oil and some non-oil revenue sources such as the Electronic Money Transfer Levy (EMTL), Recoveries & Fines, etc. Government must explore cheaper alternative sources of financing away from debt. In the revised budget as passed by the National Assembly, the projected retained revenue was raised to N10.3trillion against the N10.13trillion proposed in the revised 2022 budget. This may be too ambitious when we look at the budgeted revenue performance for 2021.

Reacting to the budget proposal, the Lagos Chamber of Commerce and Industry (LCCI), expressed concern that of the items for which more funding would be sought are recurrent expenditures.

The LCCI said: "We understand the government may be under pressure regarding these recurrent expenses, but it is not best practice to borrow for consumption.

"Since revenue fundamentals are currently weak, the ideal thing is to reduce the cost of borrowing, specifically, the high deficit and debt cost projected in the revised federal budget. The Federal Government should focus more on non-interest asset-linked securities as these unlock revenue and growth in the long term. The Federal Government should allow the private sector to invest in some infrastructure projects that are commercially viable to generate revenue to fund her budget instead of debt financing."

It stated that current push for more revenue should not compel the government owned businesses (GOEs) to undermine the health of the business environment in the pursuit of revenue targets.

It also welcomed the government's commitment to supervise the spending of the GOEs to curtail any form of wasteful spending. "There should be a strong corporate governance framework and strict monitoring mechanisms to supervise spending by the GOEs restricting them to the approved 50 percent spending limit from their generated revenues," the LCCI said.

Similarly, the National President of the Nigeria Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Mr. J.C. Udeagbala,said that the association worried by the upward swing in the borrowing to finance the budget and emphasized the need to watch Nigeria's rising debt profile.

Udeagbala said that there must be caution in what component of the budget that would be financed since "a sustainable debt profile requires that borrowed funds must be used for critical infrastructure projects that will enable payback of these loans."

He also drew government's attention to the boom and burst cycle of international crude oil prices, which could not be relied upon as firm and assured sources of revenue.

"Rather there must be continued efforts to diversify the economy, improve significantly on nonoil revenue and deliver on upgrade of infrastructure and improvement in security situation. This is to enable increase in productive activities especially in the Agric sector.

"This budget has been described as "Budget of Economic Growth and Sustainability." We, however, hope that in its implementation it will be a Budget of Inclusive Economic Growth" in which no one will be left behind especially the poor segment of our population," Udeagbala said.

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