ISLAMABAD: The federal government, working alongside provincial authorities, has initiated a comprehensive crackdown targeting the illicit cigarette market, which has seen rapid growth across Pakistan. This announcement was made during the launch of a research report by Oxford Economics, focusing on the scale and impact of illegal cigarette trade in the country.
Minister of State for Finance Bilal Azhar Kayani emphasized that provincial governments will strengthen enforcement efforts to eradicate the widespread availability of untaxed cigarette brands. He described controlling the illegal cigarette market as an imperative step, highlighting the substantial financial losses inflicted on the national treasury, the undermining of the formal economy, and the discouragement of compliant taxpayers. Kayani also noted that several illegal cigarette manufacturing facilities have already been closed, with ongoing raids targeting retailers involved in illicit sales.
The Oxford Economics report, titled An Economic Assessment of the Illicit Cigarette Market in Pakistan, reveals that illicit cigarettes now represent over half of the tobacco market in Pakistan. The study estimates the illicit cigarette volume at 43.5 billion sticks, positioning Pakistan among the countries with the highest illicit cigarette consumption globally. Despite total cigarette consumption remaining relatively stable at approximately 80 billion sticks annually over the past decade, legal sales have been steadily replaced by illegal products.
The report identifies sharp increases in excise duties as a major factor driving this shift. Between the first quarter of 2022 and the second quarter of 2023, real excise taxes surged by 107%, significantly widening the price difference between legal and illicit cigarettes. On average, illegal cigarettes are about 36% cheaper, which has encouraged consumers to switch to lower-priced illicit options.
Andrew Logan, Director of Industry Consulting at Oxford Economics, highlighted the risks of abrupt and unpredictable tax hikes. He pointed out that Pakistan’s experience demonstrates how quickly consumption patterns change when affordability gaps widen and enforcement is inconsistent.
On the supply side, the illicit cigarette market is predominantly domestic. Approximately 64% of tax-evaded cigarettes are produced within Pakistan, mainly in Azad Jammu and Kashmir (AJK) and Khyber Pakhtunkhwa. The remaining 36% are smuggled into the country, primarily through routes from Afghanistan, involving cigarette brands linked to the UAE and South Korea. The report notes that porous borders, organized crime networks, and weak enforcement mechanisms exacerbate the problem.
Logan stressed the necessity for sustained and coordinated enforcement efforts across the entire supply chain. He warned that without predictable policies and consistent enforcement, illicit operators will continue to erode government revenues and legitimate businesses.
The report concludes that effectively reducing illicit cigarette trade will require a long-term, coordinated strategy. This approach should combine stable taxation policies with enhanced enforcement measures across borders, supply chains, retail outlets, and comprehensive nationwide track and trace systems.
