Illicit Tobacco Trade in Ethiopia
Illicit cigarette trade is most prevalent in regions bordering Somalia and other points of entry due to porous borders and weak customs enforcement.
Increasing cigarette taxes does not lead to an increase in illicit trade.
A Track and Trace system is one of the most effective ways to control illicit trade as it improves the traceability of products along the value chain.
Illicit tobacco trade refers to the production, import, export, distribution, purchase, sale, or possession of a tobacco product in contravention of the law. This trade also includes the sale of smuggled genuine or counterfeit cigarettes.
This document provides information on the prevalence of an illicit cigarette trade in Ethiopia, the various types of the illicit tobacco trade in relation to points of entry, and the different cigarette brands. It also highlights and addresses some of the myths promulgated by the tobacco industry, methods to reduce illicit trade, and success stories from other countries that have curtailed illicit cigarette trade.
Prevalence of Illicit Tobacco
Trade in Ethiopia
According to a survey done in 2018 under the auspices of Campaign for Tobacco Free Kids (CTFK), it was found that 18.9% of the cigarettes sold were illicit. The study employed a cross-sectional observational study of empty packs that were obtained from two types of retailers (kiosks and street vendors) and from the streets in ten towns representing ten regional states and two autonomous cities.
Further analysis and weighting was done based on this research and illicit cigarette trade made up an estimated 45% of the overall cigarette market in Ethiopia in 2018.Prevalence of Illicit Tobacco Products in Ethiopia Urban Areas
The pervasiveness of the illicit tobacco trade in Ethiopia undermines the effectiveness of the newly implemented tax law, both from a public health and fiscal standpoint. From a fiscal perspective, illicit trade causes the government to lose huge tax revenues. Cheaper priced cigarettes on the other hand can increase cigarette consumption, adversely affecting public health and burdening the health system. Illicit trade also has disproportionate economic and social implications, including instability due to smuggling and insecurity due to unmonitored cross-border transactions.
This study showed that the illicit tobacco trade is most prevalent in Somali (97.7%), Dire Dawa (86.6%), and Afar (8.5%), and that the share of illicit cigarette packs varies considerably across the country, with as many as 97.7% of the packs collected near the Eastern border which Ethiopia shares with Somalia being illicit. The communities in these areas experience informal cross-border trading of cigarettes, even though the government contends that such activity lowers revenue from customs duties and taxes, endangers public health, and increases security risks.
Brand Types
in Ethiopia
Despite the tight control of the market by the NTE/JTI monopoly, many foreign brands find their way into Ethiopia illegally.
Of the 30 cigarette brands that were collected in a cross-sectional survey in 2018,
26 were foreign and 4 were domestic. At the time of the data collection, there were only four domestic brands in Ethiopia and not all foreign brands were regarded as illegal. Moreover, a larger variety of cigarette brands was collected from street sellers than from retailers. To date, Nyala remains the most widely available and popular brand in Ethiopia, claiming more than 60% of the market. A rapid assessment of retail prices for various cigarette brands, conducted in Addis Ababa in 2021, showed that there are illegal brands with a higher price than Nyala rapidly gaining a larger share of the market. This suggests that consumers are willing to pay more than the prices of Nyala or other local brands, although the reasons behind this are a matter for further study.Until late 2019, NTE imported and distributed an international cigarette brand manufactured by a known international tobacco company. This international product, however, became illegal in 2020 when NTE began to manufacture Winston and stopped importing other international brands.
Tobacco Industry Arguments
Myths and Facts
Myth: A rise in taxes leads to an increase in illicit trade.
Fact: There is substantial evidence that shows an increase in taxes does not necessarily lead to increase in illicit trade.
Myth: The tobacco industry provides reliable data.
Fact: The tobacco industry is known to produce unreliable data that fits its narrative.
Myth: The tobacco industry can be trusted as a key partner to reduce smoking and end the tobacco pandemic.
Fact: The tobacco industry cannot be trusted to help end the tobacco pandemic.
Myth: Illicit trade only takes place in urban areas of Ethiopia and near the border.
Fact: Illicit trade is a country-wide problem and not just found in the borders and urban areas.
Countering Illicit
Trade
Measures controlling the illicit tobacco market are a necessary component of a well-designed tobacco-control policy. This section highlights the measures that have been found to be effective in controlling illicit trade and showcases global best practices.
Recommendations for Combatting Illicit Trade
Expedite Ratification of the WHO Protocol to Eliminate Illicit Trade in Tobacco Products, Including Implementing a Track and Trace System
Adopt and strengthen the existing enforcement capacity of customs or reinforce border protection and the product movement control system along the regions bordering other countries
Invest in Research and Tools that Monitor Illicit Trade
Success Stories
Kenya’s track and trace system increased excise tax revenue
In 2013, Kenya implemented a track and trace system that increased excise tax revenues by 20% between 2013 and 2016.
The Kenyan Revenue Authority estimates that the market share of the illicit cigarette trade declined from 12% in 2013 to 5% in 2016 as a direct result of the implemented track and trace measures.
South Africa increased tax rates without resulting in drastic increase in illicit trade
Between 1993 and 2009, South Africa increased tobacco taxes by more than 10% a year over and above the inflation rate. During this time, smoking prevalence fell from 32% to 20.5%. Government revenue increased from 3.7 billion Rand in 1993 to 12 billion Rand in 2009 (in constant 2014 prices).
Despite warnings from the tobacco industry that this would lead to a drastic increase in illicit trade, the illicit trade share remained around 5%. The South African government improved public health by decreasing smoking and was able to increase revenue. Despite the rapid increase in the excise tax, there was no noticeable increase in illicit trade.Between 2010 and 2017, illicit trade has increased significantly, despite the fact the taxes increased at a rate of 1% – 2% a year, compared to an average of 10% a year between 1993 and 2009. During this time, a specialized unit that focused on illicit trade in tobacco in the South African Revenue service was disbanded. This significantly weakened the enforcement of tobacco control laws.
Romania improved tobacco control enforcement and reduced illicit trade
Romania improved the enforcement of tobacco-control policies by creating a better legislative framework that includes a total ban on advertising, and on smoking on public transport and in nearly all indoor public places and indoor workplaces. The law also strengthened the administrative capacity of customs, and focused on specific and more effective controls to curb cigarette smuggling; by the end of 2013, the size of the illicit market had decreased to 11.4% (from 19%-30% in 2010) of the total market.
Colombia increased taxes and implemented other tobacco-control policies to have the greatest impact
In 2015, Colombia was planning to increase tobacco taxes drastically. The Colombian government was worried that this might lead to an increase in illicit trade. They passed a new anti-smuggling law before the tax increase. Tobacco taxes on a pack of 20 cigarettes increased from US$0.23 to US$0.71. After this tax increase, the price of a pack of cigarettes nearly doubled. Consumption fell from 674 million packs in 2016 to 446 million packs in 2018. Despite this large decrease in consumption, revenue nearly doubled over the same time period, and there was no significant increase in illicit trade.
Brazil brought down illicit cigarette consumption through a combination of legislation and technology
During the 1990s, Brazil’s cigarette exports increased 8000-fold but the majority of exported cigarettes found their way back to Brazil as contraband. Brazil initially dealt with this by imposing an export tax of 150% on cigarettes sent to neighboring countries, a measure that successfully reduced the prevalence of contraband cigarettes. However, tobacco companies sued the Brazilian government, on the grounds that the export tax was against free-trade legislation, and won the lawsuit, overturning the export tax.
Between 2000 and 2006, the Brazilian government kept excise taxes low in order to out-compete illicit products by motivating the legal production and supply of cheap cigarettes. This did not work, because cigarette manufacturers did not lower their prices but instead benefitted from the low tax environment. In 2007, realizing that their tax policy was not working, the government began to raise excise taxes by more than inflation, and imposed a minimum price per pack. In addition to changing its tax policy, Brazil mandated the licensing of its manufacturers and introduced a track and trace system.
The increase in excise taxes increased cigarette prices, reduced both legal and illegal cigarette consumption, and increased tax revenue. The track and trace system exposed seven manufacturers’ engagement in illicit activities and led to their closure.
Georgia successfully decreased the size of the illicit tobacco market while increasing taxes
Georgia successfully reformed its tobacco law by banning tobacco advertising, expanding the number of smoke-free places, focusing on the revenue and customs services, and introducing tax stamps on all tobacco products.
As a result, illicit cigarette consumption fell to 1.5% of total consumption in 2018, from 50% between 2000 and 2010.
