Cigarette Crisis in Egypt: Everyone Loses?

In this week's edition, we explore the cigarette crisis in Egypt, its causes, and recommendations to achieve higher tobacco-tax revenue and better public health. We also shed light on the Egyptian government's offering of additional tax breaks to the industrial sector amid other challenges industrialists are facing, and what this sector needs in order to contribute to sustainable development.

Cigarette Crisis in Egypt: Everyone Loses?

The turmoil in the Egyptian cigarette market since May 2023 has resulted in shortages of most brands of local and imported cigarettes, though production levels remain unchanged, as well as price markups of up to 100%, even in the absence of official price increase. The crisis has led smokers to buy unknown, adulterated, or smuggled cigarettes, which exacerbates the health risks of smoking and cuts into state tax revenues.

Despite official action to contain the crisis, it continues. The authorities should coordinate to ensure more effective, stricter regulation in the short term in order to protect consumers and collect tobacco tax revenues, while adjusting tobacco tax policy to improve public health in the longer term.

Causes of the current crisis

There are multiple reasons for tobacco shortages and high prices in recent months, including: 

1. Conflicting reports of current production levels

Eastern Tobacco has a 70% market share, and produces and sells the most popular cigarette brand in Egypt, Cleopatra. In the past three months, corporate statements and data have made contradictory claims about the level of cigarette production, the impact of the hard currency crunch, and the company’s ability to meet the demands of the market. Conflicting statements varied between:

• Production is declining due to tobacco shortages, with imports being held in ports because of the lack of hard currency. All told, the value of tobacco imports declined 46% year on year in the first five months of 2023. The company warned of the crisis in April 2023, and in May, it temporarily halted production of one of the most popular cigarette brands before resuming production at a reduced level that permits the firm to meet just 75% of market needs. Other sources reported that for months the company has been supplying major traders with only 50% of their usual allotment, though there has been no official confirmation of this.
• Production levels remain steady and are adequate to meet market demand; production has not been scaled back.
• The company has taken action to step up production, boosting market supply by 30% in August 2023 and an additional 15% in September. Nevertheless, the firm acknowledged that increasing production would not solve the problem, but instead would create excess demand from traders looking to stockpile tobacco products in order to meet higher demand.
• The stock of raw materials is decreasing and the company needs dollars to maintain production rates. This statement prompted the prime minister to order an increase in tobacco imports, while Global Capital concluded a deal to provide Eastern Tobacco with USD150 million to purchase the raw materials needed for manufacturing.

As the discrepancies in these announcements demonstrate, Eastern Tobacco’s actual production and distribution levels are cloaked in uncertainty, and no accurate information is available about the informal networks and markets that are claiming the bulk of the firm’s production, which, according to company officials, has remained steady or even increased. 

2. Hoarding and price manipulation pending the announcement of new tobacco taxes

The government has announced that it intends to increase the tax on tobacco and cigarettes—the hike will be approved when the House of Representatives returns from its annual recess in October—to bring in an additional EGP1.72 billion in revenue, up from EGP86.45 billion last fiscal year to EGP88.17 billion this year. The announcement spurred wholesalers, agents, and distributors to hoard products to starve the market, enabling them to sell cigarettes at black market prices before prices are officially raised.

3. Lack of sanctions for monopoly practices and price fixing

Although Egypt has statutory provisions that bar monopoly practices, regulation and enforcement—chiefly the province of the Ministry of Supply and the Consumer Protection Authority— are lax. The consumer protection law requires merchants to place the official price on the product and provides for severe penalties for violators. Although the authorities have carried out some inspections and seized large quantities of black-market cigarettes, regulatory actions remain limited, raising questions about the government’s failure to control sales and distribution, rein in monopolists, and end the worsening crisis.

More tax revenue and better public health: Do they go together?

Although generally speaking raising taxes helps to reduce tobacco consumption, data from recent years in Egypt shows that the continuous hikes in cigarette taxes and prices have not reduced sales or the number of smokers. This is because the demand for tobacco is inelastic, meaning smokers will continue to consume cigarettes no matter the price. Moreover, price increases largely affect lower-income smokers. Although the poor may have more difficulty finding the money to buy a commodity like cigarettes if the price goes up, smoking rates among the poor may remain high—smoking can be a way to cope with the constant stresses of living in poverty—and they may cut down on their food intake in order to afford cigarettes. When developing tobacco tax policies, their uneven impact on citizens must therefore be taken into account.

In order to boost tax revenues to meet budget shortfalls while also reducing smoking rates to improve the public health of citizens, experts recommend:

Does the Industrial Sector Need More Tax Breaks?

On August 27, 2023, President Abdel Fattah El-Sisi announced a new package of tax incentives to encourage industrial enterprises. Although the government has repeatedly offered tax breaks to the sector, particularly with the amendments to the 2017 investment law, they have not achieved the desired goal. The industrial sector’s contribution to GDP increased by just 1%, from 16% in 2013/14 to 17% in 2021/22, a meager improvement compared to similar countries. These figures suggest that providing additional tax incentives without addressing the fundamental challenges facing the sector will not help industry thrive. It could, however, deprive the national economy of significant tax revenue.

The industrial sector in Egypt: Where is the problem?

In terms of opportunities for industrial development, Egypt is a strategically important location in Africa due to its geographical location, the availability of land, and its productive capacity and population—it has the third largest GDP after Nigeria and South Africa and the third largest population on the continent. The Egyptian industrial sector is also quite diverse, including petroleum refineries, textiles, engineering, petrochemicals, and other industries. The sector employs some 3.5 million workers, equivalent to 13% of the total workforce in Egypt and accounts for 85% of non-oil commodity exports.

Despite all this potential, Egypt still faces a number of institutional challenges that impede sustainable growth in the industrial sector, although these are unrelated to the tax burden. The major challenges include: 

1. The absence of an environment conducive to industrial investment: Egypt does not score well on indicators for the rule of law and the protection of property rights, and antitrust laws are largely not enforced. The figure below shows institutional barriers in Egypt, in comparison with similar countries:

2.Relatively low technological, innovative, and productive capacities and poor commercial performance in the industrial sector compared to other countries: More than 50% of the value added of local manufacturing is concentrated in low-tech industries. In Morocco, for example, only 40% of local manufacturing is in such industries, whereas in Malaysia, high-tech industries contribute 20% of the total value added of manufacturing.

3.Lack of integration and linkage between manufacturing and extractive industries, which reduces the rates of utilization and productivity in many industries.

4.The volatility of the Egyptian pound, which constrains the ability of factories to plan or expand production.

Since tax incentives will not solve these problems, they do little to stimulate the industrial sector.

Tax incentives: The wrong approach to the problem

Research has found that tax breaks are generally not effective. While some studies have found that foreign direct investment is sensitive to a country’s tax system, tax incentives are not necessarily the decisive factor in investors’ decisions to enter a particular market and establish an industrial base. 

Instead of expanding costly tax exemptions that may deny the government important resources, the Egyptian industrial sector can be stimulated by:

1. The creation of a level playing field for industrial investment and production to dispel uncertainty among investors and manufacturers.
2. An effective mechanism for coordination among ministries and agencies at different levels of government. There are currently 17 entities and ministries whose work intersects with industry and industrial policy, which leads to conflicting policies and roles.
3. Transparency and consistency in the application of investment laws and industrial incentives, in addition to actions to improve intellectual property protection and create a mechanism to settle disputes in a fair, timely manner.
4. A focus on attracting investments in the value-added and export-oriented manufacturing sector.

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"Adasa" is a weekly policy digest by Alternative Policy Solutions. "Adasa" provides an analysis of a select number of policy developments and their effect on inclusive development and socioeconomic change