Tobacco Industry Data

The deceleration in tobacco industry was largely attributed to decline in the external demand for tobacco and cigarettes, which fell by 65.6 percent YoY during the first quarter of current fiscal year. STATISTICS > AREA UNDER DIFFERENT TYPES OF TOBACCO IN PAKISTAN (HECTARES) Flue-cured Virginia 27376 21301 24570 20748 20660 26312

Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Dark air-cured

White Patta

Burley

Others

Total

902 571 751 489 355 367

8069 4990 4749 5469 5472 4929

237 257 432 933 878 943

19853 19853 19873 18961 18276 *18276

56437 46972 50575 46600 45641 50827

*Estimated Full detail

STATISTICS > PRODUCTION OF DIFFERENT TYPES OF TOBACCO IN PAKISTAN (MILLION KGS) Flue-cured Virginia 64.96 50.96 59.61 51.31 50.29 65.78

Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Dark air-cured

White Patta

Burley

Others

Total

2.44 1.17 1.94 1.42 0.69 0.86

15.10 9.65 9.38 10.83 10.98 9.91

0.29 0.58 0.95 2.15 1.60 1.64

24.86 23.38 20.70 22.55 22.63 *22.63

107.65 85.74 92.58 88.26 86.19 100.82

*Estimated Full detail STATISTICS > YIELD OF DIFFERENT TYPES OF TOBACCO IN PAKISTAN (KG/HECTARE) Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Fluecured-Virginia 2372 2392 2426 2473 2434 2500

Dark air-cured 2705 2044 2583 2904 1944 2343

White Patta 1872 1943 1977 1980 2007 2011

Burley 1272 2249 2188 2304 1822 1739

Others 1252 1178 1041 1189 1238 *1238

* Estimated STATISTICS > EXPORT OF TOBACCO AND ITS PRODUCTS DURING THE LAST FIVE YEARS Year

1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

Quantity exported Tobacco Cigarettes (M.Kgs) (M.Nos) 3.90 5.98 3.20 5.49 8.27 7.17

16.060 11.770 108.240 74.23 163.96 44.73

Value realized Tobacco Cigarettes (M.Rs) (M.Rs) 273.13 578.05 231.11 316.75 642.74 626.67

7.440 6.220 49.180 45.62 124.35 46.94

Total Value (M.Rs)

(M.US$)

280.57 586.18 286.41 362.37 767.09 673.61

5.420 10.032 4.659 6.25 13.23 11.23 Full detail

STATISTICS > WEIGHTED AVERAGE PRICES PAID FOR DIFFERENT TOBACCO TYPES (1994-95 to 2003-04) (Paisa/Kg) Crop Year

FCV

DAC

WP

Burley

1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

3078 3190 3833 4101 4353 4419 4594 4619 4753 4856 5561

1041 1403 1600 1663 1713 1796 2021 2108 2119 2031 2709

1584 1841 2207 2518 2525 2530 2540 2548 2550 2560 2796

2458 2586 2953 3283 3378 3748 3989 4185 4421 4628 4872

POTENTIAL FOR EXPORT Complexities of export of tobacco and its manufacture are well known. Tobacco trade has peculiar features: for example USA, being an important exporter of un-manufactured tobacco, is the leading importer of tobacco needed for blending purposes. Quality of tobacco and price are the principal determining factors in its trade at the international level, in which a number of countries are involved. Looking at the Pakistan’s debut in international tobacco trade, it may be profitable to narrate the various stages of its import/export as follows:

I II

Stage

Year 1948 to 1968 1969 to 1971

III

1972 to 1976

IV

1977 to 1987

Subsisting Position Pakistan was a net importer of tobacco to meet the demand of cigarette industry. Self-sufficiency was attained with a capacity to supp0ly 14-16 million kgs of low grade tobacco to the Eastern Wing (Bangladesh) for industrial use. After separation of the Eastern Wing (Bangladesh), both area and production registered sharp decline. Sufficient stocks of low grade tobaccos were held by Tobacco Companies and Tobacco Agents/Mandiwalas. Possibility of its exports to other countries arose on account of surplus availability, cheaper price and devaluation of Pakistan’s rupees by 130% in 1972. Pakistan thus emerged as the cheapest seller in world market. This position subsisted upto 1975-76. Declining trend in the export of un-manufactured tobacco emerged due to following factors: a) Price competitiveness disappeared on account of escalation in domestic cost of production. Export prices of Pakistan’s tobacco, however, recorded an appreciable rise during the year 1974-1980 as is evident from the following unit value (CIF) of UK leaf imports. (Pence/kg) Year 1974 1980 % increase

India 88.2 116.2 31.7

Pakistan 63.9 109.2 70.9%

b) World production of raw tobacco during 1974-78 out- paced the global leaf usage which affected the exports/ imports generally.

V

1988 onwards

c) Anti-smoking campaign received a fillip in the European countries to which Pakistan’s tobacco was being exported. Exports of raw tobacco and cigarettes dropped abruptly to zero because of the Federal Government fiscal policy announced with the Budget Estimates for 1988-89.

The position of export of un-manufactured tobacco and cigarettes during the last six years onwards is illustrated in the following statement: Year

Quantity exported Tobacco Cigarettes (M.Kgs) (M.Nos)

Tobacco (M.Rs)

Value Cigarettes (M.Rs)

Total Value (M.Rs) (M.US$)

1999-2000

3.90

16.060

273.13

7.440

280.57

5.420

2000-2001

5.98

11.770

578.05

6.220

586.18

10.032

2001-2002

3.20

108.240

231.11

49.180

286.41

4.659

2002-2003

5.49

74.23

316.75

45.62

362.37

6.25

2003-2004 2004-2005

8.27 7.17

163.96 44.73

642.74 626.67

124.35 46.94

767.09 673.61

13.23 11.23

It will be observed from the above table that the trend of exports since the last few years up to 2000-2001 was on the ascendant. During 1999-2000 exports were worth US$ 5.420 million which grew by 85.09% to US$ 10.032 million during 2000-2001. As a result of the adverse fall-out of 9/11 incident, the exports showed a marked decline of 53.55% during 2001-2002 and were only US$ 4.659 million. Export orders were cancelled/deferred, freight charges and insurance costs increased for this part of the world, travel advisories were issued to businessmen in USA and Europe against traveling to security-sensitive regions. During the next year, 2002-03 exports showed a growth rate of 34% over the previous year and were registered at US$ 6.248 million. It will be further observed from the above statement that Pakistan exported 8270 tons tobacco valuing US$ 11.08 million during the year July, 2003-June, 2004. Total earnings from export of tobacco and its manufactures amounted to US$ 13.23 million during the year 2003-04 as compared to US$ 6.248 million during 200203 and US$ 4.659 million during 2001-02. The exports during 2003-04 were thus 111.68% higher than those of the same period July-June, 2002-03. If a comparable pace of growth is maintained during the next two years through market diversification, quality improvement, greater market access and aggressive marketing, there is hope that Pakistan could achieve a total export in the range of US$ 25-30 million by 2005-2007 and volume could reach 16-20 million kgs or 1600020000 metric tons. POTENTIAL FOR EXPORT Complexities of export of tobacco and its manufacture are well known. Tobacco trade has peculiar features: for example USA, being an important exporter of un-manufactured tobacco, is the leading importer of tobacco needed for blending purposes. Quality of tobacco and price are the principal determining factors in its trade at the international level, in which a number of countries are involved. Looking at the Pakistan’s debut in international tobacco trade, it may be profitable to narrate the various stages of its import/export as follows:

I II

Stage

Year 1948 to 1968 1969 to 1971

III

1972 to 1976

IV

1977 to 1987

Subsisting Position Pakistan was a net importer of tobacco to meet the demand of cigarette industry. Self-sufficiency was attained with a capacity to supp0ly 14-16 million kgs of low grade tobacco to the Eastern Wing (Bangladesh) for industrial use. After separation of the Eastern Wing (Bangladesh), both area and production registered sharp decline. Sufficient stocks of low grade tobaccos were held by Tobacco Companies and Tobacco Agents/Mandiwalas. Possibility of its exports to other countries arose on account of surplus availability, cheaper price and devaluation of Pakistan’s rupees by 130% in 1972. Pakistan thus emerged as the cheapest seller in world market. This position subsisted upto 1975-76. Declining trend in the export of un-manufactured tobacco emerged due to following factors: a) Price competitiveness disappeared on account of escalation in domestic cost of production. Export prices of Pakistan’s tobacco, however, recorded an appreciable rise during the year 1974-1980 as is evident from the following unit value (CIF) of UK leaf imports. (Pence/kg) Year 1974 1980 % increase

India 88.2 116.2 31.7

Pakistan 63.9 109.2 70.9%

b) World production of raw tobacco during 1974-78 out- paced the global leaf usage which affected the exports/ imports generally.

V

1988 onwards

c) Anti-smoking campaign received a fillip in the European countries to which Pakistan’s tobacco was being exported. Exports of raw tobacco and cigarettes dropped abruptly to zero because of the Federal Government fiscal policy announced with the Budget Estimates for 1988-89.

The position of export of un-manufactured tobacco and cigarettes during the last six years onwards is illustrated in the

following statement: Year

Quantity exported Tobacco Cigarettes (M.Kgs) (M.Nos)

Tobacco (M.Rs)

Value Cigarettes (M.Rs)

Total Value (M.Rs) (M.US$)

1999-2000

3.90

16.060

273.13

7.440

280.57

5.420

2000-2001

5.98

11.770

578.05

6.220

586.18

10.032

2001-2002

3.20

108.240

231.11

49.180

286.41

4.659

2002-2003

5.49

74.23

316.75

45.62

362.37

6.25

2003-2004 2004-2005

8.27 7.17

163.96 44.73

642.74 626.67

124.35 46.94

767.09 673.61

13.23 11.23

It will be observed from the above table that the trend of exports since the last few years up to 2000-2001 was on the ascendant. During 1999-2000 exports were worth US$ 5.420 million which grew by 85.09% to US$ 10.032 million during 2000-2001. As a result of the adverse fall-out of 9/11 incident, the exports showed a marked decline of 53.55% during 2001-2002 and were only US$ 4.659 million. Export orders were cancelled/deferred, freight charges and insurance costs increased for this part of the world, travel advisories were issued to businessmen in USA and Europe against traveling to security-sensitive regions. During the next year, 2002-03 exports showed a growth rate of 34% over the previous year and were registered at US$ 6.248 million. It will be further observed from the above statement that Pakistan exported 8270 tons tobacco valuing US$ 11.08 million during the year July, 2003-June, 2004. Total earnings from export of tobacco and its manufactures amounted to US$ 13.23 million during the year 2003-04 as compared to US$ 6.248 million during 200203 and US$ 4.659 million during 2001-02. The exports during 2003-04 were thus 111.68% higher than those of the same period July-June, 2002-03. If a comparable pace of growth is maintained during the next two years through market diversification, quality improvement, greater market access and aggressive marketing, there is hope that Pakistan could achieve a total export in the range of US$ 25-30 million by 2005-2007 and volume could reach 16-20 million kgs or 1600020000 metric tons. Exports > Major Exporters/Manufacturers Pakistan Tobacco Company Lakson Tobacco Company Souvenir Tobacco Company Saleem Cigarette Industry Universal Tobacco Company Imperial Cigarette Industry Khyber Tobacco Company International Cigarette Industry Walton Tobacco Company Sarhad Cigarette Industry Exports > Major Importing Countries of Pakistani Tobacco during JULY, 2004 to JUNE, 2005

S.No

Country

Tobacco Quantity Value (Kgs) (000Rs) 1227929 158795

Cigarettes Quantity Value (000No) (000Rs) -

Cigar Total value Quantity Value (000Rs) (000No) (000Rs) 158795

1.

Russian Federation

2.

Egypt (UAR)

1093746

119655

-

-

-

-

119655

3.

Paraguay

709689

29635

-

-

-

-

29635

4.

Ukraine

519200

74314

-

-

-

-

74314

5.

U.S.A.

517311

43261

-

-

-

-

43261

6.

France.

456846

15662

-

-

-

-

15662

7.

Bangladesh.

367577

15805

-

-

-

-

15805

8.

United Arab Emirates.

344560

40317

12560

12600

2690

5559

58476

9.

Afghanistan.

311035

12991

1250

1051

-

-

14042

10. Malaysia

300829

22747

-

-

-

-

22747

11. Dubai.

273479

33327

4700

3847

600

1448

38622

12. Yemen. 13. Iran. 14. Rwanda.

179864 150430 137781

4048 4603 16235

6000 -

4755 -

180 730

377 1491

4048 9735 17726

15. 16. 17. 18. 19. 20.

Oman. Switzerland. Sweden. Saudi Arabia. Hong Kong S.A.Re.Chi. Netherlands.

115608 108000 78240 68837 59400 39600

3416 4819 2441 4354 5739 3658

-

-

66 -

134 -

3550 4819 2441 4354 5739 3658

NOTE: The tobacco is exported in the form of tobacco not stemmed/stripped, tobacco wholly/partly, stemmed/stripped, tobacco chewing and other tobacco manufactured. MARKETING Under Section 6(a) of the Pakistan Tobacco Board’s Ordinance, 1968 different types of tobacco have been classified into grades with full description thereof notified in the Government Gazette. Tobacco marketing in NWFP is regulated through Provincial Law (MLO 487 and Tobacco Marketing Control Rules, 1993 framed thereunder) while in Punjab it is regulated through Code of Ethics and decisions taken by the Board from time to time. Methodology of Marketing For proper regulation of tobacco marketing, the Pakistan Tobacco Board ascertains the requirements of various tobacco companies for different types of tobacco for the ensuing crop and publicizes the same at the time when nurseries are being laid out. The underlying idea is to create an awareness of the manufacturer's requirements amongst the growers so as to aim at a crop size bearing a relationship with the demand. The tobacco companies are bound to execute agreements with the tobacco growers in a prescribed format for their total demand of both types of Virginia as well as Burley tobacco

Methodology of Marketing of Virginia Type Tobaccos in Pakistan Methodology of W.P. Tobacco Marketing

Intimation of purchase targets to the Board by the tobacco companies under Tobacco Marketing Control Rule No.3 of 1993, framed under MLO 487: “Every tobacco company intending to purchase tobacco during a crop year shall indicate to the Board its total requirements of the tobacco from the ensuing crop, by the 21st day of October in each year. The Board will publicize the indicated requirements for various types of tobaccos, in appropriate manner, before the commencement of planting season.” Execution of Agreements Execution of agreements by the Tobacco Companies with growers by December 31, each year, under para 2(I)(1) of MLO 487: “Every tobacco company, for the purpose of purchase of its targeted requirements of flue-cured Virginia tobacco, will execute agreements with the growers of tobacco by the 31st December in respect of the ensuing crop of tobacco. A copy of each such agreement will be supplied to the growers concerned and a list of all such agreements will be furnished to the Pakistan Tobacco Board as soon as may be possible after the execution of the agreements.” Pricing Policy > Weighted Average Pricing Fixing of weighted average prices of FCV tobacco under para 2(I)(4) of MLO 487: “The weighted average price of tobacco for the crop of any year to be paid by a tobacco company to the tobacco growers shall not be lower than the weighted average price paid to them for the crop of the immediately preceding year.” Fixing of weighted average prices of W.P tobacco under para 2(II)(4) of MLO 487: "The weighted average prices to be paid by the tobacco companies and tobacco dealers, agents and mandi walas during 1985 crop shall not be less than paisa 750 per kg. The price for subsequent years will be as announced in a Gazette Notification by the Provincial Government." Pricing > FIXATION OF MINIMUM PRICES OF TOBACCO Following is the rationale for fixation of minimum prices of tobacco crop under section 8 of PTB's Ordinance, 1968: Fixation of Prices: The Federal Government may, by notifiecation in the Official Gazette, fix the minimum prices below which and the maximum prices above which, tobacco of various grades shall not be bought or sold for consumption within Pakistan or for export; and different prices may be fixed in respect of different areas.” Methodology for the Fixation of Minimum Prices of Tobacco: For the fixation of minimum prices of tobacco, the Pakistan Tobacco Board has constituted two Special Committees-one each for NWFP and the Punjab to work out cost of production of tobacco by visiting tobacco growing areas and interviewing tobacco growers selected randomly in these two provinces. The reports of these two Special Committees, when become available, are considered in-depth by the Price and Grade Revision Committee-consisting of the representatives of tobacco growers, tobacco industry, Industries Division, Government of Pakistan, Agricultural Prices Commission, Pakistan Tobacco Board and headed by the Agricultural Development Commissioner, Government of Pakistan. This Committee formulates its recommendations for decision of the Board. And, recommendations of the Board are submitted to the Ministry of Commerce for final decision and notification of minimum prices for various types/grades of tobacco in the Gazette. For the fixation of minimum prices of tobacco, following parameters are taken into account: (i) (ii) (iii) (iv) (v) (vi)

Increase in cost of production of tobacco. Minimum prices and weighted average prices of tobacco. Rate of inflation in the country. World Tobacco trends. Increases allowed in prices of other agricultural commodities Whole-sale price index of raw materials for the industry.

Tobacco Development 1- The Board has established a well organized extension service by deploying: a) b)

Assistant Development Officers Assistant Director (Development)

19 Nos. 1 No

c)

Deputy Director (Development)

1 No.

2- Strong linkage has been established between extension workers and tobacco growers through the following activities: a) b)

Regular field days, tobacco workshops, T&V (Training and Visit) programmes are held. 1500 -2000 Model nurseries/plots are laid out annually on farmers’ fields for demonstration purpose in collaboration with Tobacco Companies. To evaluate the performance of various varieties, zonal suitability trials are laid at farmers fields under varying ecological conditions. Finding of these trials are evaluated and compiled and published in the form of bulletins and brochures and supplied to the growers. Curing and grading training programme is arranged to provide necessary practical training to growers/curers. Efforts are being continuously made to explore new potential areas for quality tobacco production. Soil and water testing service has been provided to tobacco growers for appropriate fertilizer recommendation. The Board has also initiated its Research and Development activities in the province of Baluchistan and Sindh

c) d) e) f) g) h)

Tobacco Research 1. The research work is conducted by a team of qualified scientists. 2. The Board has constituted Research and Development Committee comprising of scientists/officers from the Board, Department of Agriculture, Research Organizations/Ministry of Food & Agriculture, Managers of Tobacco Companies and representatives of Tobacco Growers. 3. The Board prepares an Annual Research and Development Plan before the commencement of crop season. 4. The research work is carried out at the following Research Stations: a)

Tobacco Research Station, Mardan in NWFP for Flue-cured Virginia and Rustica tobacco.

b)

Tobacco Research Sub-station, Mansehra in NWFP for Flue-cured Virginia.

c)

Tobacco Research Sub-station, Kunjah (Gujrat) in Punjab for Dark air-cured Virginia and Desi/Huqqa tobacco.

d)

Tobacco Research Sub-station, Okara in Punjab for Dark air-cured and Desi/Huqqa tobacco.

e)

Tobacco Research Station, Swat in NWFP for Burley tobacco.

f)

Tobacco Model Farm, Buner in NWFP for Flue-cured Virginia tobacco.

g)

Tobacco Model Farm, Hazro (Attock) in Punjab for Rustica tobacco.

h)

Tobacco Model Farm, Jampur in Punjab for Rustica tobacco

i)

Tobacco Model Farm, Pishin in Baluchistan for Rustica tobacco.

j)

Tobacco Model Farm, Dadu in Sindh for Rustica tobacco.

5. The objectives of research are: a)

To improve the yield of different types of tobacco per unit area.

b)

To improve the quality to meet the increasing domestic demands and to compete in the international market for exports.

c)

To improve the grade index of different types of tobacco.

d)

To reduce the cost of production.

6) The Board has set up the following sections for undertaking various research projects. a) Plant Breeding Evolution of new varieties with better potentiality of yield, quality and disease resistance through introduction, selection and hybridization for different regions b) Chemistry To study the chemical constituents of various tobacco varieties with reference to yield, soil and water analysis, aiming at to make appropriate recommendations to the growers for application of fertilizers including macro and micro-nutrients and to study NIC, sugar, and other constituents of tobacco leaf. c) Agronomy

Determination of appropriate plant population, adoption of improved cultural practices and development of implements for reducing the cost of production of tobacco d) Plant Pathology Study of soil and leaf borne diseases, survey of pathogens causing diseases and loss/damage assessment. Experiments on control measures through integrated control program and use of fungicides etc. e) Entomology Study of life history, distribution of insects, control measures through pesticides and integrated pest management. f) Nematology Study of various nematode species attacking tobacco, their distribution in tobacco growing areas and control measures through nematicide and integrated pest control management. g) Virology Study of various virus strains prevalent in tobacco crop, survey and extent of damage caused to tobacco crop and to suggest control of viruses through sanitary measures, crop rotation, use of resistant varieties and elimination of vectors. h) Plant Physiology To conduct experiments on topping/suckering and use of suckericides for the improvement of yield and quality of tobacco leaf with respect to nicotine contents, colour, texture, aroma and filling power etc. To establish temperature and humidity ratio for efficient curing and good quality tobacco leaf. To test various energy sources to reduce the cost of curing. Also, to adjust flue-pipes properly in the barns and to set venturi furnace for lowering cost of fuel. To introduce Tobacco Bulk Curing Barn and curing of certain types of tobacco through rack curing method. Achievements i) Introduction of technology for raising of nursery on raised beds instead of flat land. ii) Recommendation of 1000 sq.ft nursery area for transplanting one hectare tobacco. ii) Seed rate recommendations: a) FCV and Burley 1.0 to 1.5 gm per 10 sq.meter. b) Rustica – 2.5 gm per 10 sq.meter iii) Introduction of polythene sheet for quick growth of nursery, protection from frost/cold winds and for reduced nursery raising period. iv) Introduction of top ridge transplantation for better root development. v) Optimum transplantation time in Pakistan. a) for plain area Ist March to 30th March b) for sub-montane area 15th March to 15th April. vi) Recommended spacings: FCV Interline 3 ft. Intraline 2 ft. Rustica Interline 2 ft. Intraline 1 ft. vii) Fertilizer Recommendation: Type NPK kg/hectare FCV DAC Rustica

40:80:80 (plain area) 50:100:100 (sub-montane area) 100:80:80

a) White Patta 20:40:40 b) Black Patta 100:40:40 ix) For quality tobacco production, topping/desuckering is recommended at button stage leaving 22 leaves on the plant. x) Integrated pest/disease management programme has been recommended for the control of insect pests and diseases of tobacco. xi) The use of chlorinated pesticides have been banned on tobacco crop. xii) Growers are advised to pick the mature/ripe leaf for curing. xiii) The flue-curing system of virginia tobacco has been reviewed from time to time for fetching better result in respect of quality. xiv) Recently the Board has imported 2 Nos. computerized Tobacco Bulk Curing Barns for obtaining mature and uniform grade. xv) A standard grade classification system based on leaf ripeness is being followed.

Tobacco industry — growing, manufacturing, distribution and retailing — contributed 4.4 per cent or over Rs 27.5 billion to the total GDP of Pakistan including Rs 15.17 billion, including Rs 14.54 billion in excise duty and sales tax, in 1997. It is the single biggest contributor of excise duty, six-times than that from cotton yarn. Over 5 per cent of all taxes collected in the country comes from the tobacco industry. It employs over one million people directly or indirectly which in terms of fulltime equivalent jobs means 312,500 jobs supporting some 1.2 million persons. The area under tobacco cultivation increased by 30 per cent during 1990-91 to 1998-99 — from 44,000 hectares to 57,000 hectares. The production has increased even more significantly during the same period — by 145 per cent from 75,000 tonnes to 109,000 tonnes. The value-added sector, the cigarette production, depicted a far more unproportionate increase of 72 per cent — from 29.8 billion sticks to 51.5 billion sticks during the same period. Tobacco is the only crop grown in Pakistan whose yield is well above the world average and matches the per hectare yield in the US and other developed countries — an average yield of 1,900 kilograms per hectare. Tobacco industry — growing, manufacturing, distribution and retailing employs over one million persons directly or otherwise. This translates in the full time equivalent of 312,500 jobs supporting approximately 1.2 million persons. Manufacturing employs the highest number of persons — 35 per cent followed by 33 per cent by growing and 32 per cent in distribution and retail. Smuggling It is easy to understand the threat of huge revenue loss that presence and easy availability of smuggled cigarettes pose to the economy of Pakistan. The government is losing a substantial revenue of Rs 3 billion from the smuggling of cigarettes into the country. According to Aslam Khaliq, the director consumer and regulatory affairs of Pakistan Tobacco Company, the second top cigarette manufacturer after Lakson Tobacco, the government is losing at least Rs billion every year due to cigarette smuggling. He blamed the high taxation as the singular most important incentive for cigarette smuggling. This is true if one looks at the global trends of taxation on cigarettes. Smokers in Pakistan pay the highest tax in the world second only to Denmark and the UK where 85 per cent and 82 per cent of the retail price respectively goes toward taxation. In Pakistan, 78 per cent of the retail price of premium brands ( all brands whose retail price is over Rs 10 per 20 sticks) and 58 per cent of the retail price of low segment brands go toward taxation. Price war Defending the price war started by PTC by slashing the prices of a number of its middle-priced brands early this year, Aslam said that it brought numerous domestic manufacturers in the excise duty and sales tax net. For instance, slashing the prices on some of its brand by 50 per cent from Rs 19 to Rs 9 reduced the excise duty from 63 per cent to 43 per cent with sales tax remaining unchanged at 15 per cent. Despite price reduction, Aslam said, PTC was able to break even due to increased turnover and at the same time forced manufacturers who did not pay excise duty and sales tax in the net to create a level playing field. Though worried about smuggling and high taxation, Aslam expressed that cigarette prices in Pakistan are on the much low side. He said that the manufacturers should be allowed to increase the prices of their products to better their revenues which are constantly threatened by massive smuggling. He also suggested that price increases would help discourage smoking in the country. True. Experience in many countries show that each 10 per cent increase in cigarette prices results in a 5 per cent decrease in the numbers of smoking adults and much more in young adults — between 6 to 8 per cent — who have little surplus funds to spend on smoke. However, the argument that high prices discourage smoking is a bit flawed particularly in the context of Pakistan. Number one, unlike all developed and many developing countries Pakistan choose not to spend even a negligible portion of tobacco taxes on healthcare, research, education, and anti-smoking activities. Such developing countries, not to mention the developed ones, as Nepal and Peru spend a share of cigarette taxes to support cancer research and treatment. Latvia allocates 30 per cent of the revenue which it earns from the tobacco tax on healthcare. Iran earmarks a portion of tobacco tax revenue on healthcare and education. Secondly, if the manufacturers and policy makers are really serious about reducing smoking in Pakistan through price increases — and no one say that they are — they need to raise taxes on all brands of cigarettes be it locally manufactured — imported. Supporting the domestic tobacco industry against imports, as is the case with Pakistan, may be good for the local industry but negates the very argument that higher prices and taxation discourages smoking. Tobacco Industry in Pakistan By YesPakistan.com Staff Writer

Pakistan's tobacco industry has been a traditionally dependable source of government income, contributing some 27.5 billion rupees per year - the equivalent of 4.4% of Pakistan's GDP. It has the largest yield of any crop in that country and employs some 1 million Pakistanis. But in the last few years, there has been a growing concern about the ill effects of cigarette smoking and the impact it has on the health and well being of Pakistanis. For instance, approximately 90% of lung cancers in Pakistan are attributable to cigarette smoking. In the last decade or so, there has been a large anti-smoking backlash in the United States. The recent out-of-court settlement of $360 billion between "Big Tobacco" and participants in a class action suit has spurred the development of anti-smoking coalitions in other parts of the world. The decline in smoking in North America, especially the United States, has been offset by a strong push from the large tobacco companies to find converts in the developing world. As tobacco control is tightening in the West, transnational tobacco companies are becoming more active in developing countries. The result is that tobacco use is declining at the rate of 1.5% in the West but at the same time it is increasing at the rate of 1.7% in the developing countries. While the anti-tobacco movement in the USA helped lower cigarette sales, Big Tobacco, the largest US companies: Philip Morris, R.J. Reynolds and Brown and Williamson, as well as the British American Tobacco Co., have continue to expand overseas.. They have flooded the markets in Asia and Eastern Europe with advertisements, promotional products and cutprice brands designed to encourage new smokers. According to the Pakistan Pediatric Association, every day more than 1,000 children between the ages of six and 16, start smoking. It is estimated that more than a third of men and some four percent of women in the country are smokers. Every year, the government spends some US$20,000 on anti-smoking messages but cigarette companies spend millions of dollars annually on advertising. According to the prestigious advertising magazine 'Age', the Lakson Tobacco Company spent an astounding $6.4 million on publicity in 1998, making it the third largest business advertiser in Pakistan that year. Anti-tobacco campaigners accuse the government of being swayed by the tobacco industry. According to independent estimates, the Pakistani government collected over $300 million in tobacco tax in 1990, slightly more than a tenth of the government's total revenue earnings that year. Anit-tobacco activists say that whatever benefits the government is reaping in the short term from tobacco-related industries will be significantly offset by the long term health care problems of average Pakistanis devastated by smoking addictions.

Increased taxes only mean increased profits for local cigarette industry The local tobacco industry is worried about its very survival, now that legally imported foreign cigarettes have entered the market. The locals claim that the high rates of taxes imposed by the government will make it difficult for them to compete with the foreign varieties. It is said that once the mrket is open for foreign brands, the whole market will soon be flooded with foreign varieties making it difficult for the local brands to survive due to what they call 'differences between the tax structure' of the two. It was reported recently that cigarettes and tobacco generated the highest amount of excise duty in the country during the last financial year. The central excise duty collected during 1995-96 on these two products amounted to 11.5 billion rupees as compared to 10 billion during the 1994-95 financial year. According to sources in the market this steady increase in various taxes has been there since 1993 when the government increased the excise duty on cigarettes which promptly caused the increase in the end-user prices. Furthermore it is argued that the country's balance of trade would be further aggravated with legitimate cigarette imports which will soon shoot up sharply causing a drain on the country's foreign reserves. Presently, tobacco leaf is the largest agricultural produce from the Northern area bringing in more than Rs 700 million for the growers in the region and according to sources more than 200,000 families are directly or indirectly dependent on the cultivation of this crop. If the foreign brands are allowed to flood the market, they said, some of the local manufacturers

with foreign principals too, such as Philip Morris and BAT will soon close down their local factories and convert from major local manufacturers to importers. On the other hand, analysts are of the opinion that imported foreign cigarettes will have little or no impact on the local industry because both are separate segments and have no influence on one another. Local problem The local industry, analysts said, is faced with local problems and has nothing to do with whether the market is open to foreign brands or not. Taxes on this industry have been increasing since 1993 but that did not make the major players in the local market such as Premier Tobacco Company, Lakson Tobacco Company and Pakistan Tobacco Company look back in their production. According to figures available, Lakson Tobacco Company in 1990 announced an annual profit after tax which ammounted to 15 million rupees which went down to 14 million in 1991 and then increased in 1992 to Rs 25 million, a total amount of 48 million rupees was declared in 1993 as profit after tax which increased to 65 million rupees in 1994. Likewise, the halfyearly report of the company issued in December 1995 indicated that the company had an annual sales turnover of Rs 52.3 million higher than the previous year. Pakistan Tobacco Company, which is regarded as the market leader announced a total turnover of 8060 million in 1991 which went up to 8663 million in 1992, in 1993 the figure went down slightly to 8642 million rupees which picked up again the following year to 8788 million rupees in 1994 and 10151 million rupees in 1995. Sources in the market indicated that though John Player Gold Leaf which was the company's major brand in the country, was up against its smuggled foreign variety yet its sales increased by about 26.1% at the end of the year and so did those of the other brands of the company such as the popular 'Wills Kings' and Embassy. Figures from the two major players in the market indicate that the industry is doing well irrespective of certain local and international problems such as the increase in the cost of wrapping material in the international market. During the last crop season, there were reports of a surplus crop and the tobacco board had to intervene to save the farmers. All the manufacturers were required to share a prorata absorption of the surplus which in turn raised their inventory levels but this problem did not create any impact on the players. Marketing Problems Under-pricing and excessive sales promotion programmes are said to be some of the major problems of the industry. While the domestic industry indulges in what is known as under-pricing by selling their brands cheaper than those of their rivals in the same category, the manufacturers are said to be involved in excessive advertisements and other promotion programmes. The industry is known to be the largest spender on publicity worldwide. Local Vs Foreign The foreign cigarettes have been here since the days of the drug-lords when cigarettes were brought in from Dubai. The trade reached its zenith during the Afghan Transit Trade and the introduction of SRO 663. But things did not get any better by amending the SRO and suspending the ATT because those using the ATT facilities soon found the same facility by Iran and therefore even now all the consumer items that are offloaded in Bandar Abbas in Iran soon find their way to Karachi through Quetta. There are no authentic figures available as to the share of the foreign brands out of the 50 billion sticks being burnt in Pakistan annually, but analysts put the estimate at less than ten per cent of the total market. According to Omar Jilani, the country manager of R.J. Reynolds, an international cigarette manufacturer that just started marketing five of its international brands in Pakistan, both the foreign and the local brands are two separate segments of market and therefore the legally imported brands are here to compete against the smuggled foreign brands. Pakistan Tobacco Company too, has just started importing another brand, Benson & Hedges. Analysts in the market are of the view that these two importers are here to share out of the ten per cent which the parrallel market holds at present. It is reported that soon the 555, Malboro and Dunhill brands will soon come in through the main door to pitch themselves against the same brands that come in from the backdoor.

There are enough opportunities for both the sectors in the industry if the local segment could bring themselves at par with international brands and develop a standard market while the locals should rather team up with the legally imported ones to face the parallel market which is not only a problem for both but also for the government as well as the society at large.