How Domestic Tobacco Production is Blown in Favor of Importers

Every country in the world is trying to protect local production and even countries considered free homeland and capitalism pursue protectionist policies in one form or another. In our reality this is the other way around, and by deliberate or unwise regulation we are cutting back on domestic production in favor of imports.

This is exactly the case with local tobacco. Where local production was sacrificed for bankruptcy. However, the influx of the same kind of imported product into the country increased significantly during the same period. Everything started with the introduction of Law on Tobacco. To the extent that the law was adopted without any economic analysis and calculations, it created many problems from the outset. However, the law significantly struck domestic production as soon as it came into force.

It all started with the utopian goal of reducing tobacco consumption through rising prices. To this end, the rate of excise duty on cigarettes has been steadily increasing from 2013 to 2019. The only exception was 2014 when the excise tax on cigarettes was not increased. As world practice shows, rising prices do not have a significant impact on consumption. Likewise, the constant rise in prices for filtered cigarettes has led us to shift to consumer domestic production, which has been affected by a relatively small increase in excise taxes. Consequently, in 2016, tobacco imports in the country amounted to 1.6% less than in 2016.

However, domestic production grew at a much faster pace during the same period. For example, if there were 24 million packages of unfiltered cigarettes in the local market in 2015, that figure increased to 35 million in 2016. In 2017, the local market saw more than 73 million packages of unfiltered cigarettes. 

According to the data, the goal was not achieved and the number of smokers was not reduced. Even if it were to be reduced, as mentioned, the idea was utopian, and no such thing happens in the world. However paradoxical it may sound, formally this utopian idea has become the basis for a decisive and deadly blow to local production.

January 1, 2019, was the date of the decisive blow. It was on January 1 that a whole bunch of taxes went into effect that had to destroy local production, and so it did. Specifically, from January 1, 2019, the customary tax on imported filtered cigarettes increased - companies pay 30 percent instead of 10 percent of the cost of the box.

In addition, the excise duty rate on filtered and unfiltered cigarettes was equal to 1.70 GEL per 20 cigarettes. Previously the excise tax on non-filtered cigarettes was 60 tetri. Clearly, by putting high-quality and low-quality products in the same conditions, the unfiltered cigarette has all been forgotten. This action was directed against local production. More than 90% of unfiltered cigarettes were locally produced. The result did not come soon enough, and if in 2016 -2017 there was a rise in local production in just two years, local production would be intentionally killed.

Specifically, if we look at the official data, the number of excise duties on unfiltered cigarettes in 2019 has decreased 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.

As we can see, we have intentionally or unintentionally reduced local production to the benefit of importers. However, this is not all. Another insurmountable challenge faced by the regulation is smuggled products that pose significant problems for both the legal markets and the country's budget.

For example, in July-September 2018, the value of duty-free tobacco seized by the Investigation Service 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 opened in the first quarter of 2019 compared to the first quarter of 2019 for the import of undeclared tobacco in the country.

Amid all this, one of the initiators of the law, Guguli Maghradze, once again said last week that the law is noble, it is tailored to the interests of citizens and will not allow it to be revised.

Source: BFM.ge/ Author: Petre Inauri