The Banjul Breweries Saga: Why kill the Golden Goose that Lays the Golden Egg
By now, the chorus of public opinion on the Banjul Breweries Ltd saga has saturated new media both online and in print. It will be recalled that during the budget speech of the Honorable Minister of Finance, said that fiscal position remains critically tight hence requiring the employment of innovative ways to boost domestic revenue mobilization. Increasing excise tax, which is a tax on production from 10% to 75% on the only award winning brewery that, has been in the Gambia for over 40 years does not show any innovative way of taxation, rather it is becoming very evident that this prohibitive tax is having the undesired effect. This could potential lead to the closing of a manufacturing factorythat has been a loyal taxpayer to the government and one of the few manufacturing industries in the Gambia that stood the test of time.
The company started construction of its bottling plant in 1975 and began producing the Gambia’s only locally produced beer in 1977. Banjul Breweries is The Gambia’s only brewery and one of the oldest companies in The Gambia, with its landmark Julbrew label.Banjul Breweries Ltd also makes non-alcoholic beverages under the name Julpearl. The drinks company also bottle and sell the pricier Guinness. Banjul Breweries have won the Monde Selection, Brussels Gold Award at least 4 times: 1979, 1987, 1990 & 1999.
From the evidence of the management of Banjul breweries, they mentioned that from December 2018 to March 2019 alone, some D97million dalasi has been paidas tax to the Gambia Government and this according to the company’s management; this is unsustainable and will certainly lead to a close down of operations. Taking a simple average of D24.25 million a month, over a twelve month period, Banjul Breweries would have paid annual taxes of D291 million. In 2017 a company that was voted the biggest taxpayer contributing D120 million. So it is very clear the effect of this excise tax hike is having an adverse impact on the operations of the company.
The evidence provided by the Banjul Breweries management indicated that the IMF informed them that they never advised the government to apply this policy all at once to increase the excise tax from 10% to 75% in one swoop. If anything this tax increase should have been done gradually and should never be near 75%, which will serve as a disincentive to a manufacturing company and other potential manufacturers that the country will want to attract.
What does economic theory have to say about excessive taxation?
Any student of public finance or the economics of taxation will come across the “Laffer Curve” as shown in the diagram. (source: Foundation for Economic Education)
The shape of the curve implies that as tax rates rise, tax revenues will also increase. However, these increased tax revenues will only increase until a peak (the revenue maximizing point), and after which, the tax revenues begin to decline. This means that after a point it is counter-intuitive to keep increasing tax rates. The green part of the graph shows that an increase in tax rate will increase tax revenue and the purple part of the graph shows that any further increase in tax rate will reduce tax revenue.
To better understand the graph, you have to understand where placing the tax rate at either end of the X-axis would mean. If the government imposed a tax rate of 0 percent, the government would not collect any revenue. If the government imposed a tax rate of 100 percent, individuals would no longer work and businesses would no longer produce goods, as there would be no incentive to do so. While there are varying schools of thought from economists on where the tax rate should be placed, economic principles show that lowering the tax rate gives more of an incentive to produce and grow the economy. One of the cardinal principles of lower taxation is to accelerate economic growth. The question to ask is this – is the 75% excise tax on Banjul Breweries serving as an incentive to produce and grow the economy or serving as a disincentive to close operations causing a loss of government revenue from one of the largest tax paying institutions to government and the loss of 200 direct employment and thousands of indirect employment from suppliers, distributors, hotels, restaurants etc.From the graph, the theory tells us that at 75% tax rate (in the purple region), there is a corresponding lower tax rate (green region) that will give you the same tax revenue. This is an empirical exercise and this has been proven in practice in the real world.
The idea behind the Laffer Curve is that people, companies will stop or be discouraged from working after a certain point because the tax rates will be too high. This is precisely the situation as explained by economic theory that is happening with Banjul Breweries, hence the huge cry from the breweries management that they might be forced to close.
Is this a demonstration of economic policy inconsistency by the Government of the Gambia?
It is clear that the government depends on tax revenue and grants to oil the machinery of government. The latest IMF staff-monitoring program shows that there are weaknesses in domestic revenue mobilization and the Gambia’s tax mobilization is well below the average performance of sub-sahara Africa. The challenge for the government is to broaden the tax revenue base and increasing the efficiency of the tax system. Over taxing Banjul Breweries does not introduce efficiency of the tax base neither does it widen the tax base.
The key problem in the Gambia’s fiscal policy is the high level of debt of D6 billion at end of 2018 and we are spending over 50% of domestic revenue to service the debt. This is unsustainable and the key economic challenge for the Gambian economy lies with the high level of debt and debt servicing. Imagine of 50% of the tax revenue was used to provide service delivery to reduce poverty, create jobs for the youths and improve the quality of life for Gambians. The government to its credit is making efforts to ensure that debt relief can be granted to the country. This also means that contracting of loans to finance the National Development Plan is now going to be an issue and the government should rely on grants.
Curbing spending in line with the revenue that is generated domestically should be a priority. We need to be mindful of contracting loans for capital expenditure given that the country is in debt distress.
The loss of employment as a result of potential closure of Banjul Breweries
We have been told that 200 employees of Banjul Breweries are at risk of losing their jobs. This is the direct employment effect and if you add the indirect employment from distributors, retailers etc. we can conservatively say that it will impactat least another 1000-2000 people. If every breadwinner supports 6-10 family members, we are at a minimum talking about affecting the welfare of up to 22,000 Gambians at risk as a result of the closure of Banjul Breweries. Children whose parents use to pay their school fees will no longer be able to go to school and families will suffer as a result of falling into poverty. At this stage of our country economic development, this is not what the government wants but its fiscal policy is having the reverse effect.
Going forward – what is the advice to the government.
Banjul Breweries is one of the few industries that have been in existence for over 40 years and without doubt have contributed immensely to the Gambian economy. The government should encourage more industries that will create jobs and support economic development. This is now an opportune time for an industrial policy to support national development. Industrialization is key for economic development. No country or region in the world has ever achieved prosperity and a decent socio-economic life for its citizens without the development of a robust industrial sector. The path to industrialization is through agriculture by transforming primary produce and adding value.
Apart from industrial policy, the government needs to improve the business environment and yes “listen to public opinion on critical issues”. It is ironic that the Gambia chamber of commerce had no say to provide its opinion on the huge tax hike on beer. Going forward it will be useful for the government to engage in consultations with the Gambia Chamber of commerce to discuss issues of taxes and how this will affect the business sector.
No country should ever want to be in a high tax rate. It is beyond logic as to why the government would want to have a high excise tax at 75%, where if you lower the tax rate you will collect more revenue and have more output, employment and production.
By increasing the tax rate on beer, the government is reducing the attractiveness of doing this manufacturing activity in the Gambia and will shrink and do more damage to the tax base. This is through tax avoidance, providing greater incentive to evade taxes and act as a disincentive to the labor market by not providing youths with the needed jobs. Banjul Breweries can relocate to neighboring Senegal and with bi-lateral trade agreements on duty free and tariff free goods, they can export back to the Gambia and the government will be the one losing out in terms of revenue. Let us not forget that the major shareholders are now French investors who can easily relocate the plant to Senegal.
My final advice to the government is to establish an independent Economic Council or Council of Economic Advisers made up of highly qualified and experienced practitioners in both the Gambia and diaspora to provide advice to the president on fiscal and economic policies. The composition can include representatives from the Gambia Chamber of Commerce and Industry, Trade Unions and TANGO.
It is never too late to have policy reversal of this bad government fiscal policy that is detrimental to economic development, growth and employment generation. The 75% excise tax on Banjul Breweries does not make economic sense and this is not the time to kill the 40 year old the golden goose that lays the golden eggs.
Basil Jones is the Gender and CSO Program and Policy Coordinator in the African Development Bank’s Gender, Women and Civil Society Department. Prior this he was the Advisor to the Special Envoy on Gender and Vice President of the African Development Bank in November 2015 to December 2016. Other positions he has occupied in the Bank are Assistant to the Chief Economist and Vice President, of the Economics Complex from June 2012 to September 2015 and Principal Capacity Development Specialist in the Bank’s Fragile States Unit from June 2009 to May 2012. Before joining the Bank, he worked for 8 years as a Senior Program Specialist with the International Development Research Centre (IDRC) in Senegal and Kenya. He worked at the Central Bank of the Gambia Economic Research Department from 1988 to 1997. He holds a PhD in economics from the University of Hull in UK.