Cigarettes in CY22

Amid the economic gloom and doom, political chaos and associated uncertainties, Pakistanis appeared to have smoked less tobacco in the turbulent year that was 2022. Based on the latest data from the Pakistan Bureau of Statistics (PBS), the total production of cigarettes in the formal sector stood at 52.5 billion sticks in C22, down by 8 percent year-on-year (4.5 billion lower than CY21). (The official data has to be consumed with a grain of salt, as it does not capture production in informal ‘grey’ sector).

Formal production capacity is 60 billion+ sticks p.a. (5 billion+ sticks/month). Averaging 4.38 billion/month, the cigarette output in CY22 was 30 percent lower than the industry’s peak monthly output of 6.3 billion sticks (seen in April 2018). In the first half of CY22, production had averaged 4.9 billion sticks/month (up by 10% YoY) – it had looked then that the industry might the 60 billion mark by year-end. But then the second half numbers came in markedly lower, averaging 3.9 billion sticks/month (down by 24% YoY).

Two back-to-back FED hikes – first during the budget season in June 2022 and the second one a couple of months later in August 2022 – led to a decline in industry’s 2H output. However, the fall in output isn’t as catastrophic as initially feared. While output declined by nearly a third in Jul-Sep 2022 to 10.4 billion sticks, the production fall in Oct-Dec 2022 was restrained at 16 percent year-on-year to 12.96 billion sticks. (In the latest reporting month, output fell 29 percent YoY in December 2022 to 3.97 billion sticks).

The increase in the FED, as well as the rising cost of production that was reflected in the retail prices, played a prominent part in lower consumption and falling cigarette production level in the official numbers. As per the recent PBS data on inflation, the average market price of a mainstream, affordable-segment cigarette brand at the end of the month of December 2022 was up by 37 percent year-on-year to Rs115.

Now the latest development is that the federal government, which is under pressure to create fiscal avenues to revive the IMF program, has massively hiked FED on cigarettes (both in the premium and affordable/value tiers). As those measures are now passed by the National Assembly under the so called ‘mini budget’ package of tax measures, it would further increase cigarette prices and lead to lower output. However, the government is expecting a large haul of some Rs60 billion from raising the cigarette FED.

Lowering cigarette consumption per capita is beneficial for public health, so higher FED does help in that regard, but it remains to be seen if lofty fiscal expectations are eventually met. With cigarette prices expected to shoot up significantly, consumer behavior is likely to change in response – folks will either smoke less or shift to relatively cheaper brands. It will be interesting to see how cigarette manufacturers will adjust their messaging after the government’s big move.