Opinion: Cigarette smuggling in Sri Lanka, Hype vs. Reality
By Harini Weerasekera
In the run up to elections, Sri
Lanka is once again witnessing various
news
activities highlighting how the government is losing revenue due to
increased consumption of illicit cigarettes and beedi. However, the wider
government policy on tobacco control is aimed to reduce smoking rates and the
related direct and indirect costs – which was estimated to amount to 6%
of government revenue in 2015 – through taxation. This blog argues that
although controlling the availability of illegal cigarettes in the market is
important, this should be done through regulation so that both legal and
illegal cigarette consumption remains low in the country.
Furthermore, attempts to arrive
at estimates on illicit cigarettes/smuggling and its effects on government
revenue are hampered by data limitations. This blog uses the most reliable data
available and busts popular smuggling-related myths propagated in the media, to
demonstrate that smuggling should be controlled by regulation, while keeping
taxes high.
Myth 1: There is a robust estimate of the illicit cigarette market
size in Sri Lanka
The Tobacco Control Research
Group at the University of Bath, UK has shown how tobacco companies exaggerate
the extent of illicit tobacco by commissioning studies whose methodology and
validity are unclear and misquoting
data in the media. A 2019 study
conducted in Colombia found that the tobacco industry estimate of the illicit
cigarette market is significantly exaggerated at 18%, when illicit cigarettes represented only 6.4%
of total cigarette consumption in 2017.
The story is not too different
here in Sri Lanka. Various aspects of illicit tobacco trade are highlighted in
local media, quoting
vague sources and misrepresented
official statistics. In addition, research reports have estimated the size
of the illicit market using questionable methodologies. For instance, a 2017
study using a disposed cigarette butt/pack collection technique, found that
15% of butts and 10% of packs came from
the illicit market. However, both estimates are questionable. The study relied
on tobacco company expertise to distinguish formal butts from illicit butts. Further,
the packs for the study were collected in high
tourist density districts, potentially creating an upward bias in the results. As
such the estimate of Rs. 80 billion loss in tax revenue to the government arrived
at by this study based on the abovementioned figures is unreliable.
On the other hand, the same study
found through test purchases, that only 3% of cigarettes sold in the open
market were illicit. Due to the sample districts chosen, it is likely that the
pack/butt collection method largely captures foreign cigarettes making its way
into the country via tourists hand-carrying cigarettes, while the test
purchases method gives a more accurate estimate of the supply of illicit
cigarettes.
More recently in 2019, a report
estimated the illicit cigarette share to be 21% of the total market. However,
this estimate is arrived at by comparing 2016 cigarette consumption data,
against 2019 sales data, which again distorts the estimation.
Myth 2: Beedi consumption has risen following tax hikes on cigarettes
Alcohol and Drug Information
Centre’s (ADIC) survey data
indicate that beedi consumption – rolled-leaf cigarettes sold in the informal
market – has in fact declined over time. The ADIC SPOT Survey is a trend survey
developed and conducted by ADIC since 1998, on tobacco smoking trends in Sri
Lanka. As a percentage of current smokers, the share of beedi users has
declined from 11% in 2013 to 5.4% in 2017. Further, in 2017, only 2.5%
of current smokers were found to be substituting away from cigarettes to beedi,
following cigarette price increases; in contrast, 87% reduced cigarette usage
and 3% switched to low-price cigarettes. This data contradicts the argument floating
in the media that smokers replace formal cigarettes with illicit cigarettes and
beedi.
It is also interesting that stories
about beedi consumption appear to be more common in the months preceding national
budgets. Google trends suggest that there were spikes (red circles) in the
search term ‘beedi’ in the months preceding budget speeches (orange circles) in
2014, 2016, and 2019 (2015 had an interim budget and the 2018 budget reading
was pushed to March 2019). This might suggest that stories are being placed
intentionally, to sway policymakers away from tax hikes on cigarettes in
upcoming budgets.
Disentangling hype
from reality is crucial
Tobacco control experts argue
that if a rational taxation
policy (a policy involving consistency in frequency
and extent of tax increases) was implemented over the years, a far larger sum of
revenue – than the supposed Rs. 80 billion lost to smuggling – could have been recovered
by the government, whilst reducing tobacco consumption. In contrast, increasing
revenue by lowering tax rates would only result in higher tobacco consumption
and, on balance, a higher cost burden to the government; a cost of Rs.
89 billion was incurred by Sri Lanka from tobacco, in 2015.
Moreover, the ‘myths’ presented here
point towards the fact that information on cigarette smuggling activities and
illicit tobacco products – whether it be articles in the press or studies –
must be taken with a pinch of salt. The existing evidence base tends to be subject
to tobacco industry influence or have limitations in estimation techniques, as
demonstrated in this article. A
well-documented tactic employed by tobacco companies worldwide is to
heighten the perception of illicit tobacco trade when governments decide to
implement tobacco taxation or tobacco control policies – Sri Lanka appears to
be experiencing a similar phenomenon.
For this reason, disentangling
the hype surrounding illicit tobacco from the reality is crucial. It is
important to increase the evidence base of reliable estimates on the informal
market so that false information that is circulated – and picked up as
legitimate by policymakers – can be effectively combatted. More importantly, the
issue of smuggling must be tackled through effective regulation, whilst keeping
tax rates high, in order to reduce smoking prevalence to under 10%.