Health and wealth priced out by bad advice

The illicit or grey market in Sri Lanka has surpassed the legal cigarette market

By Kumar Ranaweera 

In the past two months alone, nearly Rs. 600 million worth of illicit cigarettes were detected at entry points, highlighting a surge in cigarettes smuggled into the country. According to media and research reports, over one billion foreign cigarettes are believed to reach Sri Lankan shores annually, and this year that number is touted to grow. The resultant loss to the Government is estimated to be over Rs. 100 billion.

Sri Lanka is a hotspot for cigarette smuggling due to its high price point, and according to the World Health Organization, has one of the most expensive cigarettes in per capita earning terms. For instance, when standard legal cigarettes are Rs. 160, a smuggled product could be purchased for just Rs. 100. Additionally, capsulated cigarettes are banned in Sri Lanka. But illegal ‘switch’ cigarettes are available for just Rs. 120. If a 100 million sticks of capsulated cigarettes reach Sri Lankan shores offering a retail margin of Rs. 20, smugglers take home Rs. 10 billion. When returns are so high vis-a-vis low risk, smugglers pay scant regard to regulations. 

A lot is said about how cigarettes are hazardous to health and must therefore be priced out. This can ring true only with the absence of a grey market. The illicit or grey market in Sri Lanka has surpassed the legal cigarette market. This was recently highlighted by statistics published by the Ceylon Tobacco Company in its latest Annual Report placed the grey market at 40% of total share and over 1.1 billion smuggled cigarettes. 

What this situation does is it removes accountability. No smuggler takes responsibility for the public health hazards they pose and the perversion of justice. Nevertheless, at current prices many consumers faced little choice but to switch to smuggled, cheaper alternatives. It has become commonplace to blame the cigarette company for all non-communicable diseases, even where they are not. Banning or pricing products out rarely works. Consumers and smugglers find ways to achieve their end. 

What led Sri Lanka here, where did the country get it wrong? Perhaps it was a mix of misguided policy-makers and advice. But from where does such advice flow? Was it simply a misplaced public official, or was it vested lobby groups led by experts that know little about grassroots and ground economics. The problem with Sri Lanka, on many occasions, is they get too caught up in formulas and theory as opposed to what really drives results. Such theories are often pushed by vested NGOs that support sections of our political machinery, and they rarely bode well for Sri Lanka.

Even the learned MP Dr. Harsha De Silva, who extensively discusses principles of price elasticity and the Laffer Curve (relationship between tax rates and tax revenue), seems to overlook these fundamentals when it comes to cigarette pricing. 

Dr. De Silva, in some of his comments at the Parliamentary Committee on Public Finance quoted the Institute of Policy Studies stating the illicit cigarette share is just 1.4% of the market. However, in the past two months alone, nearly Rs. 300 million worth of illicit cigarettes have been detected at entry points, highlighting a significant surge in smuggling activities. This raises the critical question: at what cost are these actions being tolerated?

Sri Lanka is not a country that can reduce cigarette prices. But it could still adopt realistic pricing and control measures. The Government, led by President Anura Kumara Disanayake, must take serious and concrete steps to control the flow of illicit cigarettes into the country, before it loses sight of health and revenue indices. This is a serious problem that is not receiving the level of attention it should. Perhaps it is not receiving the right advice in this regard.