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Economic policy – What is government smoking?

11 January 2017 11:25 am - 0     - {{hitsCtrl.values.hits}}


In a milieu of heightening tensions and a public fraught with recompensing the economic sins of government, a statement issued by Ceylon Tobacco Company (CTC) on a downturn intimated to further woes. 
The statement to the media by the company said that it had changed its operations at the Colombo factory from three shifts to two, leading to a 20 percent headcount reduction, on the back of a 45 percent drop in sales during the last three months, following tax increases in October and November last year. On the face of it, one would rightfully point to the merits of such a statement, principal amongst them being the apparent emergence of a healthy society. 
However, reality poses much more than what meets the eye. But before we delve deeper and notwithstanding the obvious harms of the product, let us establish that the tobacco trade – represented solely in Sri Lanka by CTC – is a legally operating entity for well over a century, touching the lives of consumers, farmers and traders islandwide at various length. Smoking remains an informed adult choice and in no manner is this article notated to promote or condone its consumption. 
The economic effects stemming from the CTC statement are far from reassuring and are threefold. At ground level, the company reports that it provides for the livelihoods of up to 300,000 Sri Lankans via direct and indirect employment, infusing over Rs.8 billion in value to grassroots economies. Proportionately, that’s 60,000 lives impacted with a dip of close to Rs.2 billion in economic value. 
The company states there are 20,000 farmers and 72,000 traders islandwide who depend on incomes generated by the tobacco trade; what alternatives will government provide for those who are impacted? Alternate crops – they would surely say, but guaranteed prices in Sri Lanka offer no real guarantee as witnessed by recent protests and with a myriad of meddling middle men to deal with that transition away from tobacco will not be an easy one. 
An article published in the Daily Mirror of September last year quotes a farmer in Galewela asserting “tobacco farming is more profitable than other crops producing high returns, whilst the lack of a fixed price for other crops poses a number of serious problems.” CTC says four of its leaf depots will be shut down in this process and as per estimates, 4,000 farmer families will now lose close to Rs.500 million in annual income. How policy-makers will make amends for these poor farmers is anybody’s guess.  
These are outcomes of two sweeping price revisions by the government late last year, which rendered a Sri Lankan fag the second most expensive in Asia just behind Singapore. Consequent to the excise hike in October last year and the imposition of 15 percent VAT in November, the price of the most popular brand of cigarettes has risen sharply to Rs.50, which translates to a 43 percent hike over the course of one month. With cost-of-living undeniably looking ‘up’ the barrel, a 45 percent drop in tobacco consumption can hardly be a surprise. 
Ill-timed measures 
Again, in the context of controlling consumption and improving public health, these measures appear laudable. But for a government besieged with debt-servicing and struggling to provide relief to an increasingly aggrieved public, these measures seem poorly-conceived and undeniably ill-timed. Foreign debt-servicing rose160 percent to almost US $ 5 billion in 2015 and is expected to grow further with movements in global interest rates. 
Globally, investment engines have slowed down with many industries opting to ‘wait-and-see’ particularly in the lead-up to the Trump milieu. Boosting domestic production, savings and safeguarding revenues become essential to an economy in the ‘ICU’. These latest pricing measures by government may have all but killed a goose that lays a golden egg. 
In 2015, CTC contributed a staggering Rs.91.6 billion to government revenue. Up until the third quarter of 2016, the company reported Rs.73 billion excise revenue to the government. Following the introduction of the new taxes, revenue from excise in the last quarter dipped from a projected Rs.27 billion to Rs.14 billion a quarter. 
With volume figures of 2016, the first three quarters and at pre-October prices, it is projected that the government would have earned a mammoth Rs.115 billion from the industry in 2017. Now it will linger well below the Rs.90 billion mark. With an external debt ratio of 54 percent to gross domestic product (GDP) and rising, one wonders if these measures could have received some deeper thought.
Thirdly, as alluded further in the CTC statement, it quotes Koest saying, “The high prices of legal cigarettes have driven smokers to products such as beedi or smuggled cigarettes while putting severe pressure on volumes. Smokers are substituting legal cigarettes with cheaper and illegal alternatives. As a result, the government has lost over Rs.10 billion in revenue during the last quarter of 2016. This defeats some of the government’s major objectives such as improving public health and 
increasing revenue.” 
The Rs.10 billion Koest refers to is the revenue that CTC would likely have pumped into the system under the previous price regime. But the actual loss is close to thrice that amount. Sri Lanka with its extremely high price for tobacco products remains a preferred destination for smugglers worldwide. Just 1,000 cartons (20 boxes) of smuggled product will yield traffickers an estimated Rs.8 million in absolute profit and smugglers know better than to rustle a mere 1,000. 
Official estimates point out that more than 100 million sticks valued at over Rs.5 billion are smuggled into the country every year, whilst millions more go undetected. Cheaper and greater in allure, disenchanted smokers will find illicit a cheaper and ready alternative, whilst smugglers would continue to ensure an 
unlimited supply. 
Once again, it is government revenues that take a beating, on top of health impacts from the harsher inferior products that the consumer will now turn on. In addition, with the recent price increase, a cigarette stick is an astronomical Rs.45 higher than a beedi, which are largely unregulated and untaxed – and by no means the cottage industry that some still think it to be.
Koest has urged the government “not to impose further taxes and excise increases as it will lead to far reaching impacts”. In addition to the economy, the tobacco tax lends multiple social and agronomy impacts, which a government grappling with economic balance would do well to observe. Smoking is a consumer’s informed choice and governments worldwide have learned to ‘live and let live’ regulating pricing and consumption patterns in a 
sustainable manner.
Developing a sustainable economic policy has been a cornerstone of the Yahapalana pledge and sustainability encompasses the long-term interests of every stakeholder. They must be perceptive, unprejudiced and applicable… and perhaps these will come one day along with 
a Volkswagen.
(Patrick De Silva is an attorney-at-law and serves as a regulatory affairs consultant to leading agronomic institutions in Sri Lanka and Australia with over three decades of experience. He can be reached at


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