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May 27, 2020

The tobacco narrative

The writer is an executive producer, Geo News and editor of Jang – The Economist annual edition.

The Covid-19 pandemic is changing the world in ways that were imaginable only in the realm of science fiction. The economic order of things is shifting fast for a lot of countries, especially the developing ones. Already under pressure from technological disruption, they now need to speed up the transition while simultaneously rearranging their priorities for revenue generation.

Remittances had started to take a hit even before the pandemic. Countries were sending back foreign workers in the wake of rising nationalism. Now with the number of jobs being lost to the pandemic, this trend will hardly slow down and developing countries will lose more of their remittance stream. Exports too have started to decline and will continue to do so, at least for the time being, as consumers review their lifestyle choices. Governments will get further pushed into tight economic corners, where one quick way for them to balance their budget will be to plug the already identified holes in their sources of income.

For Pakistan, one such step is to urgently tackle the black-market sale of cigarettes for primarily three reasons. First, ‘smoking is injurious to health’ and strikes a huge dent to the health budget. The most effective way to curb smoking is to increase the price of cigarettes by taxing them heavily and making sure the tax increase is reflected in the price. The second reason is to make sure the tax increase fully reaches state coffers. Revenue losses to the government from cigarette tax evasion could reach over Rs70 billion in 2019-20. That is a lot of money to let go. The third reason is where things get tricky.

Pakistan is a signatory to the WHO’s Framework Convention on Tobacco Control (FCTC) as well as to its Protocol to Eliminate Illicit Trade in Tobacco Products (ITP). This requires the country to implement the Tracking and Tracing (T&T) system that would allow authorities to mark cigarette packs and rolling tobacco with secure, unique ID so that they can be traced from their point of manufacture all the way through the supply chain to the point where all taxes have been paid. This is crucial in keeping an eye on the tobacco industry’s massive and intricate supply chain; if these products still end up in the black market they can be traced back to where the problem arose.

Signatories to this protocol have until 2023 to implement a system that ensures no cigarette slips out of the supply chain and falls onto the black market. But Pakistan does not have that kind of time. One of the IMF conditions tied to the release of the bailout loan was for Pakistan to issue a tobacco T&T licence by the end of September 2019. It has already missed the deadline. Black market cigarette sales rob countries of millions in tax income and because they are cheap, thwart public health campaigns against smoking. But here’s the kicker. The global T&T system was developed considering overwhelming evidence of the tobacco industry’s involvement in the smuggling of their own cigarettes and was intended to stop this involvement.

Things were hunky dory for the tobacco industry till about the early 1990s. That is when the world started rising to the health dangers of smoking, calling for strict legislation and higher taxes. Then in the late 1990s, it was revealed how big companies had been orchestrating the smuggling of their own cigarettes across the world and that a third of global cigarette exports were ending up in the black market. Operations were allegedly carried out through subsidiaries, third-party contracts, and in some cases from downright illegal factories. Realizing the enormity of the problem, the WHO Tobacco Control Framework FCTC, adopted in 2003, became one of the most quickly ratified treaties in UN history.

So obviously, major tobacco companies have a clear vested interest in trying to control T&T systems. But before getting into the T&T license issue in Pakistan, one lesser asked and even less understood question is: why would tobacco companies smuggle their own product? For several reasons in fact, the most obvious being that tobacco is a highly taxed product and by black-marketing their own packs, companies avoid paying taxes. Second, as they are not taxed smuggled cigarettes are cheaper, companies are able to target price-sensitive smokers, including children, and hence sell more. Third, smuggling helps bypass tobacco control measures that would otherwise dent sales.

All this can be addressed quite effectively by a T&T system run independently of the tobacco industry. Just like their global counterparts, both the major tobacco companies in Pakistan have been ahead of the government with a two-pronged approach: one, by controlling data, and two, by controlling the narrative.

First, the data. No one knows more about the buyers than the sellers. Most of the data on tobacco smuggling is controlled by companies themselves but fronted through third parties. Over the years this has been used to exaggerate the problem of smuggling and hence companies now control the narrative that they are the victims and not perpetrators of smuggling. Controlling the narrative is not a problem if there's tons of black-market cash flowing around. The Mandra raid of 2017 is a case in point. A warehouse in this town of Tehsil Gujar Khan, Punjab, was raided by tax officials, where they found a huge tobacco manufacturing and packing factory along with nearly 60 million black market cigarettes. In the years since, most of the media reports highlight the issue as simply an example of underground cigarette operation.

Tobacco giants have known for years that a T&T system is inevitable. Pakistan is required by both the WHO and the IMF to install a T&T system that would effectively audit all tobacco products produced in, imported into, or transiting through its territory.

The bidding process was initiated in August 2019 for a five-year license. But the process quickly became controversial and within two months landed in court. On May 6, 2020, the Islamabad High Court cancelled the multi-million-dollar license issued by the FBR to the NRTC. The FBR has been asked to restart the bidding process. That is good news. The Illicit Trade Protocol requires that due to conflict of interest the T&T system cannot be operated by or delegated to the tobacco industry.

Two major companies of Pakistan control 98 percent of the legitimate market. Given substantial tax earnings from them and the obvious lack of competition, successive governments in Pakistan have had little choice but to leave it upon these two giants to declare their own production in good faith. Streams of global evidence collected by advocacy groups prove that the tobacco industry cannot be trusted to be part of the solution because it is very much part of the problem.

In this regard, OCCRP published two important citations: First by academic Hana Ross, a researcher at the University of Cape Town who studies tobacco control, that “although under-reporting of cigarette production is a problem in many countries, the level in Pakistan borders on ‘obnoxious’, and the second one is an estimation by Pakistan’s Social Policy and Development Centre that “allowing tobacco companies to self-declare cost the country 143 to 448 million dollars in lost taxes each year, between 2015 and 2018.”

An effective T&T system would force Pakistan’s tobacco giants to become transparent about how much they produce and how much they owe in taxes. The stakes are as high for the tobacco industry as for Pakistan. So, in awarding the T&T licence, the government of Pakistan must ensure that the contract is fully in line with Article 5.3 of the WHO Framework and its Protocol.