A closer look at the Sri Lankan tobacco market

By Deshan Fernando

Over the last 10 years, Sri Lanka has been passionately pursuing a war against tobacco, together with Government agencies and not-for-profit organisations combining their efforts in order to increase regulation and taxation measures on the tobacco industry. 

In fact, Sri Lanka was one of the first countries to ratify the Framework Convention on Tobacco Control (FCTC) which is a set of policy measures created by the World Health Organization (WHO) with the goal of eliminating smoking across the globe. 

The FCTC contains provisions on demand reduction, product packaging, price and tax measures, restrictions on tobacco advertising and sponsorship, as well as reducing dependence on tobacco. According to a report conducted by the WHO, Sri Lanka has a high compliance on smoke-free policies, and has the lowest prevalence of teen smoking in the world, at just 1.7%. 

Further, the WHO notes that Sri Lanka records adult daily smoking prevalence at 10%. A 43% increase in the price of cigarettes in October 2016 effectively meant that Sri Lankan cigarettes are now the second most expensive in the entire Asia Pacific region.  

However, it must be noted that most of these measures have been aimed at curtailing the legal tobacco industry, which has resulted in the unintentional boosting of illegal cigarette trading in the country. 

In 2017, we have a seen an alarming growth in the number of smuggled cigarettes entering the country. According to Customs reports, in the first six months of 2017, law enforcement agencies confiscated 40.5 million illicit cigarettes, compared to the four million sticks seized during the full year 2016. 

Unfortunately, law enforcement authorities are successful in detecting only one in 10 sticks smuggled into the country, which means that close to 315 million sticks of illicit cigarettes have made their way into the market. At this rate, the illicit market in Sri Lanka has been projected to grow to 1.2 billion sticks in 2017. 

Another growing concern is the rising incidence of the growth of beedi as an increasingly cheaper alternative to cigarettes. Given the fact that purchasing legal cigarettes is becoming more and more expensive, beedi producers have seized the opportunity to capture the tobacco market, and as a result, production of beedi has doubled in many districts. 

For instance in areas like Kegalle, Anuradhapura and Badulla, more than half of the villagers are engaged in producing beedi. Here, each family’s production averages close to 1,000 sticks a day, and they are able to make a profit of Rs. 650 for each 1,000 sticks made. 

Beedi also seems to enjoy preferential treatment from the government with no Excise Tax. The only taxes levied on beedi are on the tendu wrapper, which is imported from India. However, this amounts to only Rs. 2.8 billion or 3% of the total tax revenue received from the tobacco market, and even this does not reflect the total picture of the beedi market because many producers forgo purchasing the tendu wrappers, although they are required to do so by law. 

The tax burden here is on cigarettes, which contributes a whopping 97% of tax revenue to the Government. As a tobacco product, (and a potentially more harmful one at that), the Government should take measures to ensure that price and taxation policies apply to beedi as well. 

Moreover, beedi production and consumption is largely unaccounted for by Government authorities and advocates for the anti-tobacco movement, despite the large (and still growing) portion of the tobacco market captured by beedi. This accounts for a large loss in tax revenue to the Government. And like illicit cigarettes, beedi also poses serious concerns regarding the health and safety of its consumers, as well as organised criminal activity which is promoted by the trade of these products. 

While the Government of Sri Lanka has taken steps (in particular, price and tax measures) to curb the tobacco industry, these steps have only had an impact on the legal tobacco industry, which already complies with the existing laws and regulations in the country and contributes to the Government’s tax revenues as the largest corporate contributor. It seems that these policies are only scratching the surface so to speak of the larger issues facing the country. 

It is imperative that the relevant authorities take steps to address the larger problem when it comes to the tobacco industry, which is the fact that the market has been captured by illicit cigarettes and beedi, both of which are under-regulated and in the case of beedi, undertaxed.