The significant increase in Federal Excise Duty (FED) on cigarettes has adversely affected the output of the industry. According to the State Bank of Pakistan (SBP), the output of the cigarette industry sharply declined by 34.5 percent during first quarter (July-Sep) of this fiscal year (FY20) as compared to a positive growth of 4.4 percent in the corresponding period last year.

"The primary reason of fall in production was the significant increase in FED rates on two tiers and elimination of the third tier of locally produced cigarettes," the SBP mentioned in a report.

Due to massive decline in production, contribution to Large Scale Manufacturing (LSM) growth also turned negative from 0.1 percent in the first quarter of FY19 to minus 0.7 percent in the same period of FY20.

The report said that the increase in FED had negative implications for the growth of the formal cigarette industry, as it pushed consumers towards cheaper alternatives, in the shape of illicit products that remain out of the tax net.

Illicit includes both locally produced counterfeits and those smuggled from abroad. In order to curb the prevalence of illegal products in the market, the government has developed a track and trace program that would track these products and penalize the illegal chain of tobacco dealers in the black market.

The imposition of FED has also adversely affected the output of some other industries such as automobiles. On the other hand, revenue measures also contributed in higher food inflation, as traders/manufacturers passed on the impact of higher FED on cigarettes and edible oil, and increased sales tax on sugar, to end-consumers.

The overall performance of the food sector and its growth was remained negative due to weak performances of cigarettes, soft drinks and cooking oil segments as the increase in FED on cigarettes and uncertainty regarding the imposition of an additional tax on sugary soft drinks, affected the industry, the SBP reported.