By the end of 2011, taxes on cigarettes reached 71% of their retail price following the latest tax increase in July of last year. The figure surpassed the guidelines that were outlined in the March 2011 World Health Organization’s (WHO) report. 

The report, titled “The Economics of Tobacco and Tobacco Taxation in Egypt,” had estimated raising the average tax on cigarettes to 70% of the retail price would prevent over 600,000 premature deaths in current and future smokers. While this may be a welcome development for the state budget and WHO’s outlook, it has also resulted in a flourishing illicit trade market. 

In the recent past, the Egyptian government has raised taxes on cigarettes twice. First in July 2010, when there was an 84% tax increase that led to a 48% increase in prices. In July 2011, taxes were raised by another 37%, pushing prices up 21%. Overall, the price of cigarettes has gone up nearly 80% in less than a year.

The budget for FY2011/12 shows that tax from tobacco and cigarettes will amount to LE 18 billion, which is the second-highest source of tax revenue. Instead of blocking a new tax under the premise that it would be an additional financial burden on the lower-income consumer, Parliament insisted that the tax be applied across the board, not only on imported brands. Fatimah El-Awa, regional advisor on WHO’s Tobacco Free Initiative, points out that this latest round of taxes is different than any other. “When taxes were raised on tobacco before, it was simply a fundraising tool for the government,” she says. “This time, the tax increase has a health benefit behind it, which is why it was approved by the last Parliament.” 

Common sense dictates that with price increases, smokers would be deterred from smoking. Instead, the increase in prices has been a boost for illicit tobacco trading. “What happened was that the market size did not shrink, but instead there was a heavy increase in the illicit trade of tobacco because there weren’t enough measures in place to safeguard the market from infiltration by illicit traders,” says Karim Refaat, Head of Corporate Affairs for North Africa at British American Tobacco (BAT).

According to Refaat, the illicit tobacco trade accounted for a mere 0.01% of Egypt’s 81 billion stick market in the first quarter of 2010 and now jumped to 7%, with the possibility of moving toward the 10% mark. Refaat blames pricing dynamics for allowing illegal brands to gain a wider market share. bt