Manufacturers hold incessant currency devaluation
and rising prices of raw materials responsible for price hike
By Syed M. Aslam
August 23 - 29, 1999
The post-budget increases in the price of almost all brands of
cigarettes have nothing to do with the budget. In fact, local cigarette manufacturers have
timed the post-budget confusion to resort to unannounced price increase, PAGE
Among other things the finance minister announced increase in the
excise duty on cigarettes. Though the increase was not to be affected till the first of
July, the first day of fiscal year in Pakistan, the prices of all brands of cigarettes
went up within days after the Budget 1999-2000 was announced on June 12. Two weeks later
the increase was withdrawn by the government but the prices were not reduced.
While the smokers are made to dig deeper into their pockets, the
government has chosen not to take note of the unannounced price increase for obvious
reasons. Cigarette consumption in Pakistan, like other parts of the world, is subjected to
high rate of taxes to earn a substantial revenue for the government.
Local cigarette market in Pakistan comprise of two basic segments
low-price segment and high-price segment. A fixed 63 per cent of the retail price of
high-price segment and as much as 42.6 per cent of low-priced segment, goes towards
governments excise duty. In addition, the government charges an additional 15 per
cent sales tax on the overall cigarette sales.
The low-priced segment includes all those brands whose prices do not
exceed Rs 4.50 per ten cigarettes. The central excise duty on all such brands is fixed at
Rs 1.77. All other brands whose prices exceed Rs 4.50 per ten cigarettes are subjected to
a fixed excise duty of 63 per cent of the retail price.
Any increase in cigarette prices thus means additional revenues for the
government as both the excise duty and sales tax are in-built part of the retail prices.
However, due to unspoken alliance between the cigarette manufacturers, the government has
failed to take smokers into confidence which have forced many, who could afford, to switch
over to more expensive foreign brands, many of which are smuggled into the country.
Despite a lapse of two months since the announcement of the federal
budget, and despite the unannounced price increase, the locally manufactured cigarettes
are still being sold in packs which carry old price tags. There seems to be no haste on
the part of the manufacturers to retail their respective brands in packs which depict new
prices. This provides an opportunity for the retailers to sell cigarettes at a premium at
the expense of smokers who are being kept in the dark.
For instance, prior to the budget, retail price of Gold Leaf,
manufactured by Pakistan Tobacco Company, was an all inclusive Rs 28.55. Today it is
retailing for Rs 34 per pack as the company has resorted to an unannounced price increase.
Few know that the new price is Rs 31.98 per pack. Gold Leaf is the most expensive locally
produced brand which is the bread and butter of PTC. In terms of quality it represents
over 28 per cent of total PTC production volume while in terms of sales it contributes 55
per cent to total revenue of the company.
Naveed Aftab Ahmed of the Corporate and Regulatory Affairs department
of PTC denied that the company has to do anything with the rampant over-charging. However,
a relevant question is why it is taking so long for the company to come up with the packs
which depict new prices.
Naveed said, defending the recent price increase, that they were
imperative to enhance the declining profitability of the company which has sustained loss
during last four years. He blamed the incessant currency devaluation, rising prices of
such raw materials as cigarette paper, acetate tow used in filter, the rising production
costs and a rising domestic inflation for the losses.
He defended the increase in cigarette prices, particularly Gold Leaf,
saying that it still does not cover the inflation. "In real terms, there has no
increase in the prices of cigarettes which is evident from 38 per cent increase in the
price of Gold Leaf during the last five years which translates into an annual increase of
just 6.75 per cent which is lower than the comparative inflation rates," he added.
Industry sources put the annual cigarette market in Pakistan at 55
billion cigarette sticks. The three cigarette manufacturers in the organized sector; PTC
and Lakson Tobacco Company and Premier Tobacco Company (the amalgamation of the last two
took place on January 1, 1997 when Lakson took over Premier) share among themselves about
90 per cent share of the market while the rest of the demand is met by a number of
manufacturers in the unorganized sector.
While the cigarette manufacturers have found it fit to increase the
prices under the cover of budget the government keeps on losing millions in revenues due
to massive counterfeit trade and smuggling of cigarettes. Pakistani markets are flooded
with counterfeits of Gold Leaf, the premier brand manufactured by the PTC as well as Red
& White, the best selling medium-priced brand of Lakson Tobacco. Legal importers are
also competing against smuggled products. Sources in the PTC told PAGE that the Company is
aware of the counterfeits of its imported Benson & Hedges, a premium
priced brand, but is helpless to do anything about it.