Economics of Tobacco Taxation in Egypt

Economics of Tobacco Taxation in Egypt
Ashraf S. E. Saleh Arab Academy for Science, Technology & Maritime Transport (AAST&MT) Khaled Hanafy Arab Academy for Science, Technology & Maritime Transport (AAST&MT) Frank J. Chaloupka University of Illinois at Chicago 10th February 2009

Table of content
i. ii. iii.

iv. v. vi. vii. viii.

Introduction Tobacco Use and its Consequences in Egypt Supply of Tobacco and Tobacco Products in Egypt Tobacco Control in Egypt Cigarette Taxes and Prices in Egypt The Demand For Cigarettes in Egypt Impact of Cigarette Tax Increases in Egypt Summary and Recommendations

I. Introduction
Egypt is the largest tobacco consuming country in the Arab region Cigarette smoking and waterpipe use account for nearly all tobacco use, with nearly 60 percent of male adults and almost three percent of female adults currently smoking tobacco

II. Tobacco Use and its Consequences in Egypt

Country Profile

Population 74.033 million (2008) Population growth rate 2% per year. 43 % of the population lives in urban areas 57 % in rural areas one-third of the population under the age of 15 years and only 5 % about 65 years. About one in six Egyptians lives in poverty, Since 1991 a transition process from a centralized to a market-oriented economy Unemployment 8.9 % (2007)

Adult Tobacco Use

Adult Prevalence of Tobacco Smoking Daily Tobacco Smoking Males Females Both 39.2% 0.4% 19.1% Current Tobacco Smoking 59.3% 2.7% 29.9%

Source: WHO 2008.

Youth Tobacco Use

tobacco use prevalence 17.6 % male and 8.6 % female students (13 to 15 years) (CDC, 2007). Prevalence of cigarette smoking 6.0 % of boys and 1.2 % of girls prevalence of other tobacco product 13.9 % for boys and 7.9 % for girls (CDC, 2007). other tobacco products – 22.3 %for boys and 14.1% for girls

Tobacco Product Consumption

Total Cigarette Consumption, Egypt, 1970-2004

Source: WHO report on the global tobacco epidemic, 2008, The MPOWER package

Cigarette Consumption, Egypt, 1990-2005
80 1000

70

900

800 Total Cigarette Consumption (billions) 60 700 50 Per Capita Cigarette Consumption

600

40

500

30

400

300 20 200 10

100

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year Cigarette Consumption (billions) Per Capita Cigarette Consumption

0

Source: ERC Group, 2005

Estimated Prevalence of Water Pipe Use, 2005 Rural Male 18 and older Younger than 18 13.6% Female 0.0% Male 10.5% Urban Female 0.1%

3.7%

NA

2.8%

NA

Source: WHO 2006.

Health and Economic Consequences of Tobacco Use

Smoking- Related Disease Impact in Egypt Mortality from Cancer, Respiratory and Circulatory Diseases, 2000 Numbers of deaths /World age – standardized rate per 100,000 population

Female Male Disease Trachea lung and bronchus cancer Lip, oral cavity and pharynx cancer Respiratory diseases Number 904 Rate 14.5 Number 348 Rate 4.8 Age 35+

124

2.0

87

1.1

35+

2720

50.4

2061

32.9

35+

Source: World Health Organization (WHO). Mortality database, Geneva: WHO.

Male Disease Ischemic heart diseases Stroke Other diseases of the circulatory system All causes Number 5280 13563 30613 Rate 93.1 253.1 542.6

Female Number 3833 12828 25199 Rate 60.9 207.9 398.6 Age 35+ 35+ 35+

317812

5665.4

266126

4227.8

35+

Source: World Health Organization (WHO). Mortality database, Geneva: WHO.

III. Supply of Tobacco and Tobacco Products in Egypt

Tobacco Farming

Tobacco farming has long been banned in Egypt Illegal tobacco growing occurs in the Upper Nile region for personal use All tobacco leaf used in producing tobacco is imported. In 2007, Malawi, China Brazil and India were the primary sources of tobacco leaf, while Italy, the Syrian Arab Republic, and the United States have also been important sources in previous years

Cigarette Manufacturing

Limited imports of cigarettes and other tobacco products ETC has long been the dominant firm in the Egyptian cigarette market and the largest cigarette manufacturer in the Middle East. ETC was established in 1920 and nationalized in 1956 Since 1995, the company has been slowly undergoing a transition to the private market

EC Shareholder’s Structure-2006

Source: HC Brokerage-Research Department, 2006

Cigarette Company Market Shares, 1996-2004 1996 Eastern Tobacco Company* 92.6% Philip Morris International British American Tobacco Others** 6.5% -0.7% 1998 87.8% 11.4% 0.1% 0.7% 2000 85.3% 13.8% 0.2% 0.7% 2002 93.5% 5.3% 0.5% 0.7% 2004 87.3% 6.7% 1.2% 4.8%

* Excludes brands produced under license for multinational tobacco companies. **Includes brands produced for Japan Tobacco International, Gallaher, and International Tobacco and Cigarette Company. Source: ERC Group, 2005.

Retail Cigarette Prices, Selected Brands and Years (in E£s) Brand Cleopatra Luxe 100s Cleopatra Lights Cleopatra King Size Marlboro King Size FF Rothmans L&M Kent 1996 1.60 1.55 1.50 3.40 3.40 --3.35 1999 1.60 1.60 1.60 4.00 4.00 4.00 4.00 2005 3.50 2.50 2.50 7.50 5.50 4.50 7.50

Source: ERC Group, 2005

Tobacco Employment

tobacco-dependent employment is limited to employment in tobacco product manufacturing, with nearly all of this employment in cigarette production for ETC (12,500 employee) 2006 employment in cigarette production accounted for just 0.06 % of overall employment

Illicit Trade in Tobacco Products

illicit trade in tobacco products in Egypt appears negligible (Euromonitor, 2005).

IV. Tobacco Control in Egypt

Rationale for Government Intervention

Tobacco use clearly violates both assumptions of consumer sovereignty and of that an individual fully understands the costs and benefits of these decisions and that an individual bears all of the costs and receives all of the benefits of his or her decisions. Market failure Government intervention

Tobacco Control Policy in Egypt

Egypt signed the FCTC on 17 June, 2003, ratified the treaty, on 25 February, 2005. Egypt partially restricts tobacco company marketing efforts banning advertising on national and international television and radio, in national and international magazines and newspapers on billboards and other outdoor channels. Free distribution of cigarettes tobacco company-sponsored events and brand stretching Smoking is prohibited on domestic air flights, in airports, at schools and universities, in government facilities, in cinemas and theatres, and in indoor offices, with restrictions on smoking in health care facilities. Enforcement of smoke-free air policies, however, is extremely weak

Since August 2008, Egypt has required graphic warning labels on cigarette packs, with the warning covering at least fifty percent of the primary display area on the pack Since 2002, selling cigarettes to persons less than 18 years of age has been illegal in Egypt This law is not well enforced In addition to governmental tobacco control efforts, Nasr Farid Wasel, the then Grand Mufti of Egypt issued a fatwa (a religious ruling) against tobacco smoking on 5 September, 1999

Fatwa Prohibiting Smoking

Smoking is a Prohibited Sin Smoking is a sin legally, legitimately, and definitely as affirmed by the Egyptian Fatwa Center .This fatwa was issued on 25th of Gamad Al Awal 1420 September 5th, 1999. This Fatwa proclaims that science has recently shown that the tobacco harms physically the body of the smoker and those who are around him. Also there is over spending and wasting of money and the health (exceeding the proper limits), which God has prohibited. God Almighty said, “do not kill yourselves and God is Merciful to all of you”. Also, God the Great Almighty said “Do no put yourselves in death because God likes almsgivers”. Thus, Smoking is prohibited by all legitimate measures. Issued September 5th, 1999 by Nasr Farid Wasel, the former Grand Mufti of the Arab Republic of Egypt.

V. Cigarette Taxes and Prices in Egypt

Tobacco Taxes

Egypt imposes a variety of taxes on tobacco and tobacco products, including import duties on imported tobacco leaf and tobacco products, and general sales taxes on tobacco products

Tobacco and Tobacco Products – Customs Duties
Rate Description 1st Group: Raw & Un manufactured tobacco, tobacco refuse 1-Tobacco, not stemmed/ stripped 2-Tobacco, partly or wholly stemmed/ stripped 3-Tobacco refuse 2nd Group: Cigars, cheroots, cigarillos and cigarettes, of tobacco or 1-Cigars, cheroots and cigarillos, containing tobacco 2-Cigarettes containing tobacco 3-Cigarettes with or without filter L.E 150/KG L.E 100/KG L.E 100/KG L.E 6.1/KG L.E 6.1/KG L.E 6.1/KG of tobacco substitutes

3rd Group: Other manufactured tobacco and manufactured tobacco substituted, “homogenized” or “reconstituted” tobacco, tobacco extracts and essences. 1-Smoking tobacco, whether or not containing tobacco substitutes in any proportion L.E 9/KG others 2-Homogenized “or reconstituted” tobacco 3-Cut tobacco; pressed tobacco, and chewable tobacco 4-Tobacco extracts and essences 5-Other, including snuff L.E 8/KG L.E 9/KG 20% L.E 8/KG

Source: Egyptian Ministry of Finance;

A general sales tax is applied to tobacco products sold at retail; although called a general sales tax, the tax works much like an excise tax

General Sales Taxes on Tobacco Products, Egypt, 2002-present
Raw or Unmanufactured Tobacco and Refuse Value Value Value Value Cigarettes For net-of-tax prices per pack of: - less than 65 P.T. - more than 65 to 73 P.T. - more than 73 to 84 P.T. - more than 84 to 95 P.T. - more than 95 to 106 P.T. - more than 106 to 300 P.T. - more than 300 to 425 P.T. - more than 425 P.T. (4) Molassed tobacco, snuff , chewing tobacco, shaggy mixed and unmixed (5) Essence, tobacco spirits (6) Others 83 P.T. 87 P.T. 100 P.T. 115 P.T. 128 P.T. 145 P.T. 165 P.T. 175 P.T. 50% with a minimum of L.E. 16 per net kilo of raw tobacco 50% 50% with a minimum of L.E.16 per net kilo of raw tobacco Persian tobacco for narghiles Others Cigar, pipe tobacco, compressed Toskani cigar (made of black tobacco) 100 % with a minimum of L.E. 40 per net kilogram 75 % with a minimum of L.E. 16 per net kilo 200 % with a minimum of L.E. 50 per net kilo (manufactured) 200 % with a minimum of L.E. 35 per net kilo (manufactured)

For each 20 cigarette packets and similar

Value Value Value

Trend of nominal and real tobacco taxes

Source: Calculated by the author passed on Philip Morris Sales Report2007. Note: Tax is for a mid-priced brand; for the inflation adjusted values, 1990=1.

Cigarette Tax Revenues

Tobacco Tax Revenues over the period 2002-2007 (Millions of Egyptian pounds) in Egypt
Tobacco specific excise tax (GST) 3543 3241.4 3985.5 4250 4147.2 % of Sales taxes % of Total taxes % of Total revenue

Years

2002-2003 2003-2004 2004-2005 2005-2006 2006-2007

15.34 12.2 18.64 12.34 11.24

6.36 4.83 5.26 4.34 3.93

3.97 3.18 3.59 2.84 2.53

Source: Ministry of Finance-State budget for fiscal year 2002-2007

Cigarette Prices
Cigarette Taxes and Prices, Various Brands, 2005
8.00

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

Cleopatra

Cleopatra Luxe 100s

L&M

Rothmans

Kent

Marlboro

Net-of-Tax Price

GST

Health Tax

Printing Tax

Source: ERC Group, 2005 and authors’ calculations.

Real Cigarette Prices and Per Capita Cigarette Consumption Egypt, 1995-2005
2.75 900

2.65 850 2.55

2.45 800 2.35 Per Capita Consumption Price per Pack (2007 LE)

2.25

750

2.15 700 2.05

1.95 650 1.85

1.75 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

600

Price

Per Capita Consumption

Cigarette Affordability and Per Capita Cigarette Consumption

Cigarette Affordability and Per Capita Cigarette Consumption Egypt, 1995-2005
1.05 900

1

850

0.95 Affordability (1995=1) LE)

800 Per Capita Consumption

0.9

750

0.85

700

0.8

650

0.75 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

600

Affordability

Per Capita Consumption

Note: Affordability is defined as average price divided by per capita income, with the baseline set at 1.00 in 1995.

Regional Cigarette Taxes and Prices
Cigarette Prices and Tax as a Percentage of Price Eastern Mediterranean Region
3.00 80%

70% 2.50 60% 2.00 50%

1.50

40%

30% 1.00 20% 0.50 10%

0.00

0%

Le ba no n

ni st an

Eg yp t

ai t

co

at ar

Ye m en

D jib ou ti

m an

Ira q

Jo rd a

Sy ria

Ira n

ra in

M or oc

Ku w

Ba h

Q

O

Price, USD

Tax as % of Price

Source: WHO 2008

Af gh a

Li b

ya

n

VI. The Demand For Cigarettes in Egypt

Global Evidence

Studies from high-income countries increases in taxes and prices on tobacco products lead to reductions in tobacco use Most studies have focused on cigarette smoking, price elasticities range from -0.25 to -0.5, with most of these clustered around -0.4 in low and middle-income countries. Hu and Mao (2002) estimate that the price elasticity of cigarette demand in China ranges from -0.50 to -0.64, while John (2008) estimates price elasticities in the range from -0.86 to -0.92 for bidis and -0.18 to –0.34 for cigarettes in India

Tobacco Demand in Egypt – Existing Evidence
Estimated Cigarette Price Elasticities, Egypt, 1999/2000
1999/2000 Price elasticity of demand for tobacco National Level -0.397 Urban areas -0.412 Rural areas -0.385

Price elasticity of tobacco by expenditure quartiles Q1 Q2 Q3 Q4 -0.364 -0.390 -0.408 -0.490 -0.392 -0.421 -0.423 -0.467 -0.347 -0.366 -0.380 -0.467

Price elasticity of tobacco by educational level Ed1 Ed2 Ed3 Ed4 -0.442 -0.443 -0.410 -0.441 -0.468 -0.450 -0.419 -0.409 -0.413 -0.382 -0.373 -0.356

Price elasticity of tobacco by work status Wk1 Wk2 Wk3 Wk4 -0.439 -0.473 -0.437 -0.273 -0.465 -0.506 -0.427 -0.509 -0.389 -0.421 -0.434 -0.183

Source: Nassar, 2003.

Cigarette Demand in Egypt – New Evidence

lnQt = β0 + β1lnPt + β2lnYt + β3Fatwat + εt where: Qt is the per capita consumption of cigarettes in year t, Pt is the average real price of the most popular local brand of cigarettes in year t, Yt is per capita real income in year t, Fatwat is an indicator for the years during which the Fatwa prohibiting smoking was in effect, and εt is an error variable

Cigarette Demand Estimates, Egypt, 1990-2006 Variable Constant Real Income Real Price Fatwa Indicator R-squared Adjusted Rsquared Coefficient Std. Error t-Statistic -7.043 1.597 -0.470 -0.078 0.913 0.888 1.892 0.224 0.250 0.057 -3.72 7.12 -1.88 -1.37 P-value 0.004 0.000 0.090 0.200 0.000011 1.819331

Prob(F-statistic) Durbin-Watson stat

VII. Impact of Cigarette Tax Increase in Egypt

Impact of Tax Increases on Overall Cigarette Consumption and Tax Revenues
Estimated Impact of a Cigarette Excise Tax Increase on Cigarette Consumption and Government Revenues from Cigarette Taxes
Elasticity Baseline Low (-0.40) Average (-0.435) High (-0.47)

Tax Increase to 70% of Price Cigarette Consumption (billion packs) Cigarette Price per pack Cigarette Excise Tax Excise Tax as % of Price Cigarette Excise Tax Revenues (billion LE) Increase in Cigarette Excise Tax Revenues (billion LE) 3.15 3.25 1.625 50.0% 5.12 -2.31 5.42 3.79 70.0% 8.76 3.64 2.24 5.42 3.79 70.0% 8.48 3.36 2.16 5.42 3.79 70.0% 8.20 3.08

Tax Increase to 60% of Price Cigarette Consumption (billion packs) Cigarette Price per pack Cigarette Excise Tax Excise Tax as % of Price Cigarette Excise Tax Revenues (billion LE) Increase in Cigarette Excise Tax Revenues (billion LE) 3.15 3.25 1.625 50.0% 5.12 -2.84 4.06 2.44 60.0% 6.91 1.79 2.81 4.06 2.44 60.0% 6.84 1.72 2.78 4.06 2.44 60.0% 6.78 1.66

Note: estimates may not add exactly due to rounding.

Impact on Number of Smokers and Deaths Caused by Smoking
Elasticity Baseline Low (-0.40) Average (-0.435) High (-0.47) Tax Increase to 70% of Price

Adult Smokers (millions) Deaths Caused by Smoking among Current Smokers (millions) Reduction in Number of Adult Smokers (millions) Reduction in Deaths Caused by Smoking among Adults Future Smokers among Current Youth Cohort (millions) Deaths Caused by Smoking among Future Smokers (millions) Reduction in Number of Future Smokers (millions) Reduction in Deaths among Future Smokers

17.0 6.8 --7.8 3.1 ---

14.8 6.2 2.3 636,199 5.7 2.3 2.1 832,077

14.6 6.1 2.5 691,867 5.5 2.2 2.3 904,884

14.4 6.1 2.7 747,534 5.4 2.1 2.4 977,691

Tax Increase to 60% of Price

Adult Smokers (millions) Deaths Caused by Smoking among Current Smokers (millions) Reduction in Number of Adult Smokers (millions) Reduction in Deaths Caused by Smoking among Adults Future Smokers among Current Youth Cohort (millions) Deaths Caused by Smoking among Future Smokers (millions) Reduction in Number of Future Smokers (millions) Reduction in Deaths among Future Smokers

17.0 6.8 --7.8 3.1 ---

16.2 6.6 0.9 238,575 7.0 2.8 0.8 312,029

16.1 6.6 0.9 259,450 7.0 2.8 0.8 339,331

16.0 6.5 1.0 280,325 6.9 2.8 0.9 366,634

Impact on the Poor

To the extent that concerns remain about the impact of cigarette tax increases on the poor, these can be at least partly addressed by spending the new tax revenues generated by the tax increase in a progressive manner. Using the new revenues to increase government spending on education, health care, and social assistance programs that benefit the poor can offset any negative impact of higher taxes on low income smokers who continue to smoke, as well as provide benefits to low income, non-smoking households

Illicit Trade
Figure 9: Smuggling and corruption
Tobacco smuggling rises with corruption
(Estimated smuggling level and corruption index in 1999) 20% 18%
E tim te %s u g g in c n u p s a d m g lin o s m tin Cameroon

y = -0.0318x + 0.1031 R2 = 0.0066
Korea Rep. Israel Sri Lanka Morocco Jamaica Hong Kong Greece Norw ay Portugal Estonia Lithuania Turkey Peru Denmark Trinidad Tobago Singapore Poland Finland Algeria Mozambique Albania

16% 14% 12% 10% 8% 6% 4% 2% 0% 0.0
Nigeria Indonesia Azerbaijan

Uzbekistan Bosnia Madagascar Nicaragua Uganda Senegal

Bangladesh Georgia &Vietnam

0.2

0.4

0.6

0.8

1.0

Corruption index 1= least corrupt, 0= most corrupt

Source: Yürekli and Sayginsoy 2008

Employment

Given this, reductions in smoking that result from tax increases or other tobacco control activities will have little impact on Egyptian employment as the funds once spent on tobacco products are spent on other goods and services, creating new jobs that offset any loss of tobacco-dependent jobs

VIII. Summary and Recommendations
Given this evidence, we make the following recommendations: Increase cigarette excise taxes to the level at which they account for 70 percent of the average retail price of cigarettes. Given the inelasticity of cigarette demand, a tax increase of this magnitude will increase government revenues from taxes on cigarettes while at the same time encourage many adult smokers to quit and prevent numerous youth from taking up smoking, significantly reducing the health and economic burden caused by smoking in Egypt.

Increase taxes on other tobacco products to similarly account for 70 percent of their average retail prices. Such increases will maximize the health and economic benefits of cigarette tax increases by reducing the potential for substitution to other products in response to higher cigarette prices, while at the same time generating additional tax revenues for the Egyptian government.

Modify the existing tax structure for cigarettes by imposing the same specific tax on all cigarettes. By doing this, opportunities for substitution to less expensive cigarettes in response to cigarette tax and price increases will be limited. At the same time, implement annual adjustments to this specific tax rate so that it retains its real value of time.

Earmark a portion of the new revenues resulting from the higher cigarette and other tobacco product taxes for poverty alleviation programs and tobacco cessation and prevention programs and other efforts to promote health targeting the poor. Such activities will reduce the potentially regressive impact of the higher cigarette taxes on the large segment of Egypt’s population that lives in poverty.