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Put strategy and coordination to work in

MALAYSIA loses RM5 billion in revenue to illicit cigarette trade, if a June report prepared by Oxford Economics for British American Tobacco is right. What else can we expect if 59 per cent of Malaysia’s cigarette market goes underground. The Southeast Asia Tobacco Control Alliance — pointing to a Bath University study and a World Bank report — is questioning the numbers. This notwithstanding, we do think Malaysia is taking a big tax hit from illicit cigarettes.

What can Malaysia do to stamp out this black economy? Institute for Democracy and Economic Affairs (Ideas) chief executive officer Ali Salman has a few ideas. One, put strategy and coordination to work in the fight against contraband. Absent both, the war will go on ad infinitum. Especially given the multiple agencies tasked with ending the trade. In Malaysia, the broth is at times spoiled by too many cooks.

Two, make legal products competitive. Ali says price gaps occur because legal products get priced out of the market. Cigarette fits the bill. Successive increases in tobacco excise duties have significantly increased the market price. According to Ideas, the trade in illicit cigarettes has grown significantly over the same period, to the extent that now more than half of the cigarettes smoked in Malaysia is illicit. Ali says though such an approach is a reasonable policy goal aimed at improving public health, it has been unsuccessful because smoking levels remain high and with an illicit, rather than legal, product being consumed.

Perhaps there is a way out — at least until the illicit trade is stamped out for good. Licit cigarettes may have to be made available at competitive prices. This can be done in four ways. Firstly, freeze a further increase in excise duties. Secondly, increase penalties on sale of illicit cigarettes to, say, RM100,000. Thirdly, allow tobacco companies to advertise in print media that has no young readers. Fourthly, raise public awareness of the health risk associated with consuming illicit cigarettes and the fact that the proceeds can be used to fund more harmful criminal activities. Together, the four steps may help smokers quit illicit cigarettes.

Three, make enforcement robust. Ali views weaknesses in enforcement as a significant driving factor behind illicit trade. In a paper titled “Countering Illicit Trade: Lessons from Abroad” co-written with Adli Amirullah and Amelia Lim in October last year, Ali says there is a lack of transparency and scope for corruption at the borders. Enforcement agencies have recognised the problem and taken significant steps to address it, but further action is needed.

Spain may be worth emulating, according to Ali. Between 1993 and 2000, the Spanish authorities increased their investment in fighting tobacco smuggling from €4 million to €40 million (RM18.1 million to RM181 million). Over the period, the market share of smuggled tobacco declined from 16 per cent to two per cent. This resulted in an increase of revenue from tobacco taxes from €2.3 billion to €5.2 billion. There isn’t a better business case. Millions in, billions out.

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