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After showing a recovery around the middle of year 2020, the country’s cigarette production has been on a steady path in recent months. As per latest data from the Pakistan Bureau of Statistics up till the month of November 2020, the cigarette production had reached 21.4 billion sticks in the Jul-Nov 2020 period, up by almost a fifth, or 3.5 billion more sticks, over comparative period last year.

The yearly growth in the Jul-Nov period was especially strong in the months of July (up 76% YoY) and August (up 22% YoY), the immediate months after a tobacco-neutral budget. In November 2020, there was 18 percent yearly growth. This is providing a decent push to the large-scale manufacturing growth momentum that is visible in the ongoing fiscal.

As pointed in this space earlier, the growing cigarette output has had less to do with the post-lockdown easing and more to do with internal sector dynamics. The government had earlier presented a tobacco-neutral budget for FY21 by not imposing additional duties, and since then conditions had been good for the tobacco majors to ramp up production, which they did.

Still, in the calendar year analysis, which provides better insights over a longer period in an uncertain year, the output came in lower. Between January and November 2020, cigarette production stood at 45 billion sticks, down 5 percent over Jan-Nov 2019 period. This is mainly due to declining cigarette output from January through May of 2020, a continuation of trend that had been in making since March 2019.

Average monthly production of 4 billion sticks in the 2020 analysis period is below the peak of 6 billion sticks seen in early 2018. Output didn't touch even 5 billion sticks in any month during 2020. From that lens, the industry is operating below capacity. However, recent high growth in turnovers of top tobacco companies occurred on the back of volume growth. One awaits latest quarterly results (Oct-Dec 2020).

Moving into the second leg of the fiscal, business sentiment in the industry will depend on whether the next budget is expected to be as friendly as the last one or FED-driven as the ones in 2018-19. Already, health activists are urging the federal government to implement the pre-approved Rs10/cigarette pack health tax. The health ministry has reportedly taken up the “health levy bill” with the finance ministry.

It is unclear if the health levy (which also targets sugary drinks) will be passed in the Parliament before the budget or as a separate revenue measure. The ground reality is that the government has higher revenue requirements from the economy given the steep tax collection target for FY21. That suggests that the said health levy bill may have a better chance of passing in coming months. Let’s wait and watch!