Illicit tobacco trade remains a global health problem despite efforts by governments and multilateral organizations to address it. But the COVID-19 pandemic made the problem worse.
Countries have introduced draconian measures including strict border control, and cyclical lockdowns and business closures to mitigate the spread of the infection. However, these measures have severe economic consequences. It has resulted in economic recessions, low government revenues, and widespread unemployment and poverty. The disruption of transnational movement of both goods and people have distorted the supply and demand for most products, including tobacco.
The disruption of supply and demand of goods and changes in the regulatory environment boosted the trade of illicit tobacco in many countries.
The demand for tobacco has significantly changed because of the pandemic. As household income declines because of the economic recession, consumers are in search of cheaper options. In general, illicit tobacco products have lower price points than their legal counterparts.
Lockdowns have also changed the purchasing practices of consumers. E-commerce has become a major platform for purchasing goods, but illegal players and criminal networks have used it to market illicit goods, including tobacco. The underdeveloped regulatory frameworks for e-commerce especially in low and middle-income countries made illicit tobacco more accessible to everyone including children.
More importantly, weak regulation and law enforcement are primary drivers of illicit tobacco and the pandemic has reinforced these problems. Illegal players and criminal networks have capitalized on the weak economy, fragile business environment, and overstretched law enforcement to solidify, if not legitimize their influence and increase their profits. This phenomenon of increasing illicit tobacco trade during time of crisis because of erosion of government institutions is described in empirical studies. Governments have also diverted their law enforcement resources to implement curfews, and other ‘public health’ interventions as part of their COVID response, which left many of the expected enforcement tasks unattended. This trend is already observed in some industries, including tobacco. For example, illegal mining and logging have increased significantly in several African and South American countries during the pandemic because of limited enforcement.
Restrictive tobacco policies introduced by some countries during the pandemic might have not achieved their intended impact. Malaysia, South Africa, India, and Argentina, for instance, temporarily banned the sales of tobacco products at some point during the pandemic to curb smoking. But more studies are needed to determine the benefits of such policies, available evidence suggests otherwise. For example, South Africa’s Tax Revenue Service reported US$12 million in revenues because of the ban, but the decline remains insignificant perhaps due to the proliferation of illegal tobacco products.
Implications for the Philippines
The Philippines has imposed stringent measures to control the pandemic, which in return affected the supply of and demand of goods, including tobacco products.
Last year, the Philippines experienced about 10% decline in GDP, one deepest contraction in the world. This led to lower household income and favored the consumption of cheaper and tax-unpaid tobacco products. The supply of tobacco was affected, too. Because of movement restrictions, production and traditional marketing of tobacco products have stopped.
The changes in demand and supply reflect the potential decline in tobacco smoking during the peak of lockdowns in 2020, particularly among men according to the Department of Health (DOH)’s Philippine Non-Communicable Disease Mobile Phone Survey. However, the survey is not representative of the population. More rigorous evaluation studies are needed.
Tobacco excise tax collection also slowed down. It increased from Php147 billion in 2019 to Php 149 billion in 2020, a meager increase compared to the previous year. From January to August 2020, tobacco excise tax collections dropped to P95.7 billion from P111.3 billion a year ago. A significant increase was only observed when less restrictive lockdowns were imposed in the fourth quarter of 2020.
While consumptions of tobacco products appear to have been disrupted, illicit cigarette trade appears to have flourished during pandemic as smugglers and illicit players were taking advantage of the shortage. In 2020, the Bureau of Customs (BOC) seized about Php 5.2 billion worth of illicit products, which accounted for about 50% of the total illicit goods and an increased from Php 3 billion in 2019.
The gaining popularity of e-commerce during the pandemic also boosted the proliferation of illicit tobacco products, which are typically more accessible to minors at a discounted price. Hence, the Department of Finance was alarmed and suggested banning the sales of unregistered products on online marketplaces. Some online sellers are not registered in the Bureau of Internal Revenue. They are unlikely to have skipped paying appropriate taxes.
Illicit tobacco trade and universal healthcare
It is estimated that around Php 30 billion pesos are lost to illicit tobacco, a substantial amount of resources that could be used to finance the country’s universal health care (UHC) program. In 2019, the government passed the UHC law, a landmark legislation that provides the legal basis for comprehensive health reforms. However, the reform requires enormous resources and the government needs to mobilize domestic resources to finance it. While public spending on health had dramatically increase in recent years as more resources are poured into the health sector, it remains to be low compared to other countries in the region. For instance, in 2017, public spending on health per capita in the Philippines was only USD 45 compared with USD 188 and US 65 in Thailand and Vietnam.
The lower than expected excise tax collection against the backdrop of tight fiscal space because of decreasing revenues will have repercussions not only for the needed financing for UHC, but also for the protracted pandemic response.
Capacity to address illicit tobacco trade
The increasing illicit tobacco reflects the weak capacity of the country in addressing the problem even before the pandemic. We at the Ateneo School of Government have created a composite index to measure the capacity of 160 countries to counter illicit tobacco. The index examined wide range of governance, trade, customs, and domestic tobacco policies, which are known determinants of illicit tobacco trade. Out of the 160 countries examined, the Philippines ranked 99, one of the lowest in the ASEAN region.
While the pandemic has exposed cracks in the country’s ability to address illicit tobacco trade, they have been there all along and need to be addressed as we emerge from the crisis. The illicit tobacco trade index highlights the weaknesses in the following areas: governance (e.g., law enforcement, judicial reforms) and trade and customs practices. These are the reform areas that leaders should then focus on.
Lastly, the growing problem on illicit trade must not weaken countries’ efforts to increase tobacco taxes. It must steadfast on the principle that simple and high tobacco taxes complement governance reforms in addressing tobacco epidemic.