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Falling cigarette prices in Pakistan are not a good omen for public health. Recall, federal government had effectively mandated a reduction in cigarette prices through the FY18 budget, citing growth in illicit cigarettes, whose volume the industry had claimed to reach 40 percent of total cigarette sold then. Now a research study has cast serious doubt on that claim, raising question marks on the way forward.

The study – which was commissioned by Pakistan National Heart Association and the Human Development Foundation – interviewed 2,111 retailers in ten major cities and examined nearly 8,000 empty cigarette packs in December 2017. Illicit cigarette packs were defined as any packs that didn’t comply with pictorial and textual health warnings, had textual warnings in foreign language, were duty-free, or didn’t have price and GST printed on them.

The survey concluded that just 9 percent of packs qualified that illicit cigarette definition. That’s still a far cry from the 27 percent figure making the rounds in official quarters these days. The study also showed that over 70 percent of cigarettes sold were in the price range of Rs30-60 a pack. Illicit pack share was lowest in Nowshera and Peshawar (about 1%) and highest in Quetta (39%), followed by Karachi (20%).

In recent years, the formal tobacco industry has been raising alarm over growth of illicit cigarettes – which are mostly locally-manufactured, duty-non-paid (DNP) brands that undercut the formal sector. In 2011, the industry said had put the illicit share at around 20 percent of overall cigarette sales (by volume). By early 2017, that share had swelled to 40 percent.

The claim that illicit sector was beating the formal sector black and blue was not without basis. Recall, the year ending June 30, 2017 saw revenues at top two tobacco firms – Pakistan Tobacco (PSX: PAKT) and Phillip Morris (PSX: PMPK) – drop really hard, along with government levies. To illustrate, between Jan-Jun 2017, PAKT gross revenues were down 39 percent year-on-year and PMPK net revenues dipped 57 percent year-on-year. Net profits slumped 58 percent and a loss-inducing 130 percent, respectively.

Starting 2017, the government watched in horror as its tobacco billions also tanked. It warmed up to the industry argument that DNP brands were hammering formal sales, especially in the value-for-money (VFM) segment, and moved to bring back the third pricing tier in the FY18 budget. Suddenly, with a massive tax reduction, cigarettes could be retailed below Rs58 a pack, presumably in the hopes that it will help the duopoly fight off the DNP smokes in the VFM segment.

And that it did. As per Pakistan Bureau of Statistics, about 29 billion cigarette sticks were manufactured locally in the second half of 2017, a 70 percent yearly growth that helped the industry return to its historic monthly average of roughly 5 billion sticks a month. Corporate financials bounced back, too. In Jul-Dec 2017, PAKT gross turnover jumped 32 percent year-on-year even as net profits doubled. PMPK returned to healthy profitability in this period with a top line growth of 123 percent year-on-year.

The above-cited research is not without limitations. For instance, it surveyed mainly the provincial capitals and other major cities like Rawalpindi, Multan, Hyderabad and Sukkur. It left out the interior heartlands, where illicit sector share is said to be high. Moreover, it was conducted in late 2017; six months after the tobacco majors got the retail-tax-relief and clearly took back some market share from the illicit brands.

But still, the federal government, which is on its way to present another budget later this month, must explain what is really going on. Regardless of the size of the illicit market, it makes little sense to reduce cigarette prices and create public health hazards down the road. Instead of making cigarettes affordable, the government should take effective steps to weed out cheap, illicit cigarettes from the market.

Copyright Business Recorder, 2018

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