Posted: 4 years ago

How Immature Regulation Killed Local Tobacco Production

Many challenges for local production today will be the problem of import protection, access to finance or lack of state support. However, there is a branch that, with the direct involvement of the state, has practically died and counts the last days of its existence.

We are talking about the local tobacco industry, which, if it was on the rise three years ago, today the sector is on the verge of bankruptcy, and official data show it.

For example, according to the Revenue Service of the Ministry of Finance, the number of excise duties on unfiltered cigarettes in 2019 has decreased by 25 times compared to 2018.

However, there is an even greater decline in filtered cigarettes produced locally, a 27-fold decrease in 2019 compared to the previous year. The question is what caused such stagnation in the sector, as in 2016-2017, for example, the sector was growing rapidly.

In particular, if we look at the official data again, we can see that if in 2015 there were 24 million packages of unfiltered cigarettes in the local market in 2015, this figure increased to 35 million in 2016. In 2017, the local market saw more than 73 million packages of cigarettes unfiltered.

Regulations that killed the sector:

It all started with the "Law on Tobacco", which had a seemingly noble purpose. Motivated by public concern, the senseless regulation adopted, with no economic justification, struck the various economic sectors step by step.

Soon a new regulation was devised and the rate of excise tax on filtered and unfiltered cigarettes was equalized, but the economic effects of the regulation wasn't considered.

The regulation has had quite negative effects on Georgian business, with more than 90% of unfiltered cigarettes being locally produced. Consequently, this change has virtually destroyed local businesses, which was recently confirmed by official data.

Taxation of tobacco

Not surprisingly, the above-mentioned sacrifice was not enough to achieve the utopian goal of protecting the consumer from smoking. What is more, the population is even more so consumed with the so-called low-cost product. The shift has been to tobacco. The initiators of the law had no other way left and tried to solve the problem again, using the usual method and taxing the tobacco with an excise tax.

Smuggling that destroys the legal sector

Against the background of the cascade of regulations discussed above, it would probably be logical to say that all of this had the end result and that tobacco was indeed a hard-to-reach product.

Unfortunately, however, after the bankruptcy of local production and the shutdown of all legal channels, the country can no longer cope with smuggled tobacco.

For example, if there were 16 criminal cases for tobacco smuggling in 2016, by the end of the third quarter of 2017, that number had already increased to 48. As for the quantity of tobacco seized at the border, the Ministry of Finance's Investigation Service seized 28 357 boxes of non-duty cigarettes in 2016, compared to 494 320 boxes in the third quarter of 2017.

The value of non-excise tobacco seized by the Investigation Service in July-September 2018 exceeded GEL 98,000. For the sake of clarity - the number of smuggled goods has increased 48 times between 2014 and 2016, and this process continues. If you look at last year's data, we will see that 200% more criminal cases were brought in the first quarter of 2019 compared to the first quarter of 2019 for the import of undeclared tobacco.

After analyzing the available data, we learn that we are killing local production, we have replaced the peasants and the self-employed with the resources to earn monet, the budget is losing money every year, smuggling is as powerful as ever. But after analyzing this data, it becomes even more pressing to ask why we needed all this and what the regulations that brought the country to a serious blow in many ways.