Oxford Economics highlights impacts of illicit trade to Sri Lankan economy

Growth and development come hand-in-hand with better governance and application of law and order. Ill-considered strategies result in leakages that will see us meandering in this constant state of a ‘developing nation’ – a poster-child of disappointment amongst nations with limitless promise. 

The economics and impact of illicit trade on Sri Lanka were highlighted in a report researched and published by Oxford Economics concerning the country’s tobacco industry. The report published in December 2020 found the Sri Lankan government lost up to Rs.35.3 billion in revenue during 2019, due to illegal trading of cigarettes. 

Notwithstanding the state, this translates to loss of income and livelihoods for farmers, traders and other stakeholders in the value chain numbering over 46,700, giving root to further economic stress and discontent. With state revenues and financing at the centre of discussion in this pandemic milieu, the government must take better note and action on these lapses in policy. 

The Oxford Economics report points to unsustainable price policy as the primary proponent of this predicament. It finds that over the past five years, the price of a cigarette stick grew by as much as 101 percent, pushing large numbers of consumers to switch to cheaper illicit cigarettes. 

During this period, average household income had grown by a mere 8 percent the report added, resulting in the illicit tobacco trade gaining up to 20 percent of the market. The illicit cigarette market in Sri Lanka was estimated to be over 740 million sticks in 2019. 

The most recent World Bank Human Development Report indicates that a newborn baby in Sri Lanka will live on average seven years more than in South Asia as a whole. Sri Lankans are more than 20 times less likely to live in extreme poverty than the regional average. 

However, this impressive growth has, as yet, not translated into improvements in Sri Lanka’s national finances, with government debt amounting to over 88 percent of GDP in 2019, the report states. 

“The study draws attention to the level of tax avoidance currently occurring, which, if combated, could provide an important boost to the economy as it seeks to recover from the impact of the coronavirus pandemic while not imposing price increases on consumers facing increased economic pressure,” it added. 

In 2019, Sri Lankan smokers could purchase 22 beedis or three illicit cigarettes, for the price of two legally manufactured products. During the same year, the tax on a legal cigarette was 39 times the duty levied on beedis. There is an insignificant cess levied on tendu leaf imports used to manufacture beedis. In contrast, smuggled illicit cigarettes yield no taxes to the state and provide substantial profits to traffickers, who employ these funds for illegal activities, including terrorism. 

The research team from Oxford Economics found that the declining affordability of legally manufactured cigarettes in Sri Lanka saw market share drop to 33 percent in 2019, at just 2.6 billion sticks. Alongside the growth of illicit smuggled cigarettes, at the same time the consumption of hand-rolled beedis has increased by over two billion to reach 5.1 billion sticks annually, it adds.  A unique element from their Sri Lankan experience was that illicit products are found sold alongside legal products at registered outlets, the research team reported. This demonstrates the freedom and reach with which the illicit segment operates within the country, with no checks and balances. 

The Oxford Economics report highlighted the detriments of unchecked smuggling and unsustainable pricing policy on a nation and its fiscal position. Whilst this report focuses on the tobacco sector, its findings ring true for numerous other industries in the country, particularly in agriculture as cheap and unchecked imports have destroyed farmer livelihoods, value chains and the quality of our laboured products.

The tobacco industry, however, warrants significant focus as the sector represents 6.4 percent of total government revenue in 2019, with Rs.121 billion in taxes. This is in addition to a Rs.33 billion contribution to the country’s gross domestic production. 

More importantly, “Uncollected tax revenues are not the limit of the potential consequences to Sri Lanka from the illicit trade in cigarettes. A declining legitimate market detrimentally affects the commercial viability of the legitimate industry and the wider legitimate industry in the country,” Oxford Economics added. 

(An undergraduate of the University of Colombo, Kumar Ranaweera also serves as Research Assistant at a leading audit firm in Sri Lanka)