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Up in smoke

Cigarette smuggling causes colossal loss, fuels black economy

Up in smoke

The illicit trade in tobacco products inflicted a revenue loss of Rs27.7 billion upon Pakistan last year, as per information provided to a committee of the Parliament.

Besides terrorism, cigarette smuggling also nurtured black economy, which was now estimated to be over 70 per cent of GDP against 62.8 per cent in 2005.

According to WHO affiliate “Framework Alliance and Health Bridge,” smuggled cigarettes formed a major portion of the illicit tobacco trade in the Pakistani market, and their volume was constantly rising. In the year 2015, some 27.1 billion cigarette sticks were smuggled into Pakistan against 16 billion sticks in 2007 and 18 billion sticks in 2008.

A survey based on Retail Audit Methodology, conducted by M/s Nielson in July 2015, estimated that the illicit tobacco trade increased from 21 per cent in 2014 to 23.7 per cent of the total cigarette market in Pakistan in 2015. The illicit trade in cigarettes flourished because the product is “small, light weight and profitable for illicit trade” as its “sale price is many times the cost of manufacture,” the report added.

A significant health hazard, smoking would be the single leading cause of death in the world, killing one in six adults by 2030, warns the World Bank. The mortality rate could be higher in countries like Pakistan where low quality cigarettes are smuggled in large quantities and health facilities are inadequate.

The UN framework convention on tobacco control urges all governments to enact laws to restrict the marketing and availability of tobacco. It came into force in 2005 with the ambition of saving 200 million lives by 2050, if fully implemented. In Pakistan, multiple laws already exist and if enforced rigorously these can help in curbing the illicit segment and raising more revenue for the government, the Nielson report noted.

Contrary to tobacco companies long-standing claims that cigarette smuggling concerns only the organised crime or rogue employees beyond their control, internal files of some multinational companies (MNCs) show that smuggling was exploited by their senior personnel and subsidiaries as part of a worldwide marketing strategy to increase revenues, say reports in leading Thai and British newspapers.

A pressure group ASH (Action on Smoking and Health) claims that the tobacco industry is fuelling illicit trade in cigarettes to bolster its arguments against tax increases and other anti-smoking measures.

Though methods of tax evasion by MNCs are a well-kept secret, one of these involves over-invoicing of the procurement value of the raw material and purchases from their international offices, which reduced their profits ultimately.

In Pakistan, there are three forms of illicit tobacco trade – smuggled, counterfeited and duty evaded. Amongst these, the major players in the tobacco industry — MNCs — tend to underestimate the impact of smuggling to keep the government attention focused on counterfeiting rather than smuggling.

Smuggling of cigarettes into Pakistan is a way for the MNCs to enter otherwise closed markets, create pressure to open markets to imports, undermine regulation, create a desire for smuggled brands, and earn a substantial profit, according to a report by WHO affiliate “Health Bridge” and “Framework Convention Alliance”.

Afghan Transit Trade continues to be the main corridor of smuggling of foreign cigarette brands, via the Torkham and Chaman routes. Most of the cigarette boxes are taken out of containers on the way to Afghanistan or smuggled back into Pakistan. Besides, a major chunk of cigarettes imported into Afghanistan through Iran and UAE are also smuggled into Pakistan ultimately.

It is very easy to identify smuggled cigarettes in stores because, as per Pakistani law, printing of the pictorial warning is mandatory on the front and back of every cigarette pack, while the law also binds the manufacturers to mention the name of their company along with “Made in Pakistan” on every pack.

The MNCs transfer billions of dollars abroad from their tobacco earnings but at $1.66 per pound they are paying the lowest rate for FCV (Flue-Cured Virginia) tobacco to the Pakistani farmers for their best crop. The price for FCV tobacco was $2.05 per pound in India, $3.92 in South Africa, $3.60 in Brazil, $3.20 in Malawi and $3.70 in Zimbabwe. This shows that the MNCs do not want competition in the tobacco sector and wish to monopolise their control on Pakistani farmers.

Furthermore, MNCs have not made any significant investment in Pakistan’s social sector, especially setting-up of any facility for the treatment of patients suffering from throat and lungs cancer — the diseases that are usually caused by smoking.

The MNCs also constantly remain engaged in pressurising official agencies to act in a manner that is detrimental to the growth of the local industry. For accomplishing this task, in addition to professional lobbyists, they have retained some retired influential bureaucrats as members of their Board of Directors. Due to this, the local industry is constantly monitored 24 hours a day whereas no such monitoring is being done on MNCs, which is a clear indicator of discrimination against local manufacturers to favour the MNCs.

Another example of government agencies connivance with MNCs is an official advertisement published in newspapers warning “all wholesalers, retailers and consumers, the sale and possession of smuggled/non-duty paid cigarettes is illegal,” leading to ”seizure, fine, imprisonment.” In this advertisement, pictures of MNCs popular brands involved in smuggling were not used, inserting instead pictures of the less-smuggled cigarettes.

On the other hand, by giving employment to millions of workers, the local cigarette manufacturers are balancing the whole social situation in Pakistan. They represent the tobacco growers and are helping them stand against the monopolistic interests of MNCs. If for some reason the local industry was to collapse, the MNCs would cause chaos on the crop price, consequently, reducing the farmers’ margins drastically and spreading poverty across the region, claim local industry sources.

Furthermore, the sale of low quality smuggled tobacco products lead to unhealthy and non-competitive practices through their sale at nominal price and offering a host of incentive schemes. The malpractices not only damaged the indigenous legitimate industry in terms of erosion of consumer confidence in genuine brands but also blocked further investments.

Since tax-evaded cigarettes sell at artificially low prices and are easily available, the consumers seek such alternatives to avoid pressure on their pockets. Millions of people who left smoking because of expensive cigarettes are now reverting back to smuggled brands as cheap imported cigarettes are available through smuggling networks.

The demand for illegal cigarettes is also rising because consumers do not want to carry local packs with horrible health warnings printed on them. Rather, they prefer packs which carry no health warning at all. And there is no dearth of such smuggled cigarette packets in shops and markets across the country.

As the MNCs are reported to be internationally involved in tax evasion and smuggling, the authorities need to monitor the manufacturing of cigarettes by all companies 24/7/365 with a view to curbing the flow of illicit cigarettes in the local markets.

As plugging the Pakistan-Afghanistan international porous border, which is dotted with some 144 natural passes, is difficult, the remedy, therefore, lies in identifying the main sources of smuggling and plugging them. Simultaneously, the authorities need to take steps for curtailing the demand for smuggled cigarettes through awareness campaigns and motivating people to buy only national products.

Alauddin Masood

alauddin masood
The writer is a freelance columnist based at Islamabad. He can be reached at [email protected]

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