Nigerian Local Manufacturers Bemoan High Electricity Costs & Heavy Tax Burden
Local stakeholderssuggest that manufacturing firms generate around 80% of their own electricity due to the frequent power outages in the country. The Manufacturers Association of Nigeria (MAN) reckons this accounts for close to half of their production costs.
Manufacturing firms often complain that taxes are too high and too many. In one interview, a CEO describes duties as increasing while more regulatory fees are being introduced.
Inflation was 11% in December 2018 according to the Nigerian Bureau of Statistics. There has been double-digit inflation in the country since 2016. With that happening, manufacturers have seen revenue shocks as households tighten budgets and cut disposable income.
Some manufacturing firms report local security threats that could lead to extortion or harassment.
One of the most critical operational problems for manufacturing firms in Nigeria is electricity supply. Nigeria generates less than 4,000MW for a population of about 170 million, and power outages occur so frequently that most businesses rely on diesel/petrol-fueled generators to produce their own energy. In 2017, MAN said manufacturers spend about 40% of their operational budget on generators.
Nigeria’s power supply firms are mostly privately owned, but the government disallows them from raising tariffs to keep up with rising costs—for fear that that this could cause serious public disapproval. Although the government compensates them through subsidies, this is insufficient and there’s little incentive to improve capacity due to the tariff freeze.
Manufacturing firms also complain about ‘multiple taxation’, saying that regulatory fees are simultaneously rising and increasing in number. A typical manufacturing SME has to pay fees to local, state and federal regulators, who often perform identical roles. At one roundtable we attended in Lagos in August 2018, a business leader described the regulatory environment as being set up to tax investment, not revenue.
Businesses also often have to go through numerous layers of bureaucracy to process taxes, licenses and other regulatory fees. For instance, one manufacturing SME founder recounts how she spent nearly a year trying to register her firm’s products with the National Agency for Food and Drugs Control.
Nigeria’s economy has been sputtering since it recovered from a recession in mid-2017. Manufacturing GDP managed a 2% growth in Q3 2018, while the inflation rate has been in the double digits since 2016 (the latest being 11%). Manufacturing firms have seen revenue shocks as households tighten budgets and cut disposable income. In January 2019, UK-listed soap maker PZ Cussons said its annual profits will be GBP10 million lower in the current year due to ‘extremely challenging’ macroeconomic conditions in Nigeria, its largest market.
Businesses may generally be affected by regional security threats such as those caused by separatist movements in the southeast and pastoral conflicts in the central north. In particular, manufacturing SMEs may also face extortion and harassment from hoodlums in their host community. In our conversations with SMEs on the ground, some report having to pay a settlement to local hoodlums, such as when taking delivery of supplies, in order to avoid a disruption.
The outlook for manufacturing SMEs hinges on the result of the upcoming presidential election between President Muhammadu Buhari of the All Progressives Congress and Atiku Abubakar of the People’s Democratic Party. A re-election for President Buhari will likely feature attempts to resume reforms meant to ease doing business in the country e.g. cutting the amount of regulatory paperwork and moving more processing online. But these will be superficial and overshadowed by the administration’s inherently statist programs, including energy subsidies and government job creation.
On the other hand, Abubakar has been campaigning on a liberal, private-sector driven program. It indicates that macroeconomic reforms that will support manufacturing growth are more likely to happen under an Abubakar presidency, although it appears that this will be piecemeal in any case. For instance, rather than cut energy subsidies, Abubakar’s manifesto suggests that, if he wins, the government would continue to offset pricing deficits for an unspecified period of time.
What we’re monitoring
The general elections will be held on 16 February and 2 March.