Tobacco policies must be relevant to market; IPS reports present more questions than answers

Unchecked price increases will diminish the legal share, erode Government revenue and provide further motivation to smugglers and beedi traders 

By Ajith Perera

The Institute of Policy Studies (IPS) released a report last week on tobacco tax policies, titled ‘Elasticity for Cigarettes in Sri Lanka’. The IPS in its report has deliberately disregarded several market realities, lending considerable doubt over the veracity of its projections. This determined exclusion, conceivably to satisfy sponsors, will result in added burden to Government, an already fragile economy and public health. 

The IPS report claims a 10% hike in the price of cigarettes would lead to an 8% reduction in smoking and boost Government revenue by Rs. 37 billion in 2023. It adds that tax or price increases must take place in line with inflation, and these measures would reduce 141,391 deaths by 2023 from tobacco use. 

This purported ‘comprehensive’ report bases data on findings up to 2017/18, while choosing to ignore happenings in 2019 and 2020 and not factoring in the significant changes that took place in the market. In fact, Government has raised the prices of cigarettes above inflation since 2004. Assuming that prices increased in line with inflation since 2014, the price of a cigarette would be Rs. 48 today. Instead it sits at Rs. 65, which is 35% higher. 

According to the World Health Organization (WHO) Report on the Global Tobacco Epidemic 2019, Sri Lanka has the most expensive cigarettes in the world in terms of Purchasing Power Parity, a fact that has been acknowledged by IPS in their report as well. This fact must become the primary consideration for policymakers and stakeholders when deciding tobacco tax policy. A pack of cigarettes in Sri Lanka retails at $ 6.86, whilst the closest was Thailand and India at $ 2.47 and $ 2.36 respectively. Of this cost well above 80% constituted tax, which again is amongst the highest in the region. 

Future tax increase must factor this as legal cigarettes are already out of reach for average consumers. Contrary to IPS’s claim that legal cigarette volumes in 2019 amounted to 3.1 billion, the country’s sole manufacturer of cigarettes, Ceylon Tobacco Company, reports it was only 2.6 billion as per its annual report. This gross misrepresentation of critical facts begs the questions as to the credibility of data utilised by IPS and its output model.

Despite the sale of legally manufactured cigarettes plunging, Sri Lanka’s smoking incidence has however remained unchanged and sits at 25% as reported by the WHO. This is because smokers who are unable to afford the expensive ‘legal’ cigarettes have been forced to move to cheaper and freely available substitutes such as beedi and contraband. 

The IPS report at the outset acknowledges reports of these cheaper tobacco products and undertakes to discredit its impact on the tobacco industry. However, the report neither makes reference of the prevalence or impacts of illicit cigarettes and beedi, nor does it disprove the publicly available facts on these products. Its recommendations are solely focused and based on curtailing the legal cigarette industry, which constitutes just over 30% of the total tobacco market in Sri Lanka.

Over the past two decades, Sri Lanka has rapidly transformed into a prime destination for tobacco smugglers due to its high prices on cigarettes. Selling as low as Rs. 40 in some instances, smugglers could profit up to $ 5 a pack from Sri Lanka. Detections are made at the Colombo airport and port on a constant basis, yet products are available for purchase easily. The country’s smuggled cigarette market in 2019 alone counted well over 700 million cigarette sticks, coupled with a thriving local beedi trade of over 5 billion sticks with over 450 licensed manufacturers. Beedis are priced as low as Rs. 5. 

The IPS report is drafted on the basis that the only option for smokers in Sri Lanka are legal cigarettes, intentionally disregarding the substitution effect to cheaper alternatives. The legal cigarette industry is the only tobacco trade in the country that makes significant and precise payment of tax to the Government. As evidenced in Financial Reports of Ceylon Tobacco Company, increase in the price of legal cigarettes by 100% in the last four years resulted in revenue growth at the outset, only to reduce significantly later as market consolidates costs. This has resulted in significant losses to Government over the past four years. It is estimated that if the Government had continued to impose moderate excise increases instead of ad hoc and excessive increases as we witnessed, in 2019 alone an additional Rs. 51 billion in revenue could have been earned by Government from the legal tobacco industry.

From 2014 to 2016, Government revenue from cigarettes grew an average 18% of total tax revenue. Revenue dipped for the first-time post 2016 tax changes. In 2019, it dropped to its lowest figure of 6% of total tax revenue. 

As alluded to before, despite above inflation price increases and legal volumes dropping 18% last year alone, smoking incidence remains at 25%. If increasing cigarette prices by 10% will reduce consumption by 8% as IPS claims, why has smoking incidence remained the same as evidenced? This is due to the prevalence of beedi and contraband cigarettes in the market. IPS deliberately ignores the economic impacts and the growing presence of these two segments. In addition to revenue costs to Government, these also pose significant threats to public security and safety. Unchecked price increases will diminish the legal share, erode Government revenue and provide further motivation to smugglers and beedi traders. 

The IPS report claims “if these (IPS) policies were to be implemented; by 2023: government revenue from tobacco will increase to Rs. 132 billion by 2023 from Rs. 95 billion in 2019, cigarette consumption will decline from 3.1 billion sticks consumed in 2019 to 2.1 billion sticks in 2023; smoking prevalence will decline to 12.5%”. The above makes it blatantly clear that IPS is not only has inaccurate information but is also only focusing on the legal trade. Why does the IPS constantly ignore the prevalence of illicit trade and the many controversies surrounding the beedi trade? Is it a lack of capacity, fear of rebuttal from criminal elements that support them, or is it that they do not figure on the minds of IPS’ sponsors?

Another key aspect policy makers and thinktanks such as IPS must consider is that the legal cigarette industry in Sri Lanka sustains a domestic value chain of over 170,000 livelihoods encompassing farmers, suppliers, traders and retailers – an eco-system worth over Rs. 12 billion in value. Uninitiated and prejudiced actions chasing pseudo romantic notions will only serve to undermine local livelihoods and the economy, playing and paying into hands of global racketeers.

When determining policy of any kind it is imperative to consider comprehensive real data to ensure sustainability and relevance. Bigoted, falsified reporting to gratify self-interests will only bring about harm. IPS, which claims to be the premier socio-economic thinktank, has willfully ignored elements that impact our socio-economic fabric and public health to satisfy its own end and that of the sponsor who commissioned this research. National policy thinktanks should function as catalysts for sound ideas and action, consider comprehensive data and ground realities – not serve as slaves.

(The writer is a retired Administration, Shipping and Maritime Security Consultant with extensive experience in anti-smuggling operations in Sri Lanka and the Middle East.)