Analysis Of The Tobacco Industry In Pakistan Economics Essay

2009 saw a slight decrease in legal volume sales of cigarettes in Pakistan. This was due to increases in taxation by the government as well as increased pressure from anti-smoking agencies and groups. Decrease in consumption was also due to increase in prices and illicit trade that claimed a great portion of demand for legal cigarettes. As unit prices rose, due to the taxation changes, lowest-income consumers switched to smuggled brands with lower prices.

Regardless of a number of companies operational in Tobacco in Pakistan, the Pakistan Tobacco Co Ltd continued to lead in 2009. It was followed closely by Lakson Tobacco Co Ltd. Notwithstanding strong competition between them, these two companies cooperated with tactics to guard their volume shares from illicitly traded supplies of their brands that were smuggled into Pakistan at cheaper prices. The government has currently not taken any action to bring to an end this illicit trade, nor is it expected that they would do much during the forecast period. [1] 

INTRODUCTION

Tobacco is the basic raw material for cigarette industry. At the time of independence quite a few types of tobacco having commercial importance were produced in the country except Virginia Tobacco, a type of tobacco used in the making of cigarettes. In the year 1948 plantation of Virginia tobacco started in the country and gradually reached its peak of production by producing 80 million pound crop of Virginia tobacco and Pakistan became the fifth largest producer of all types of tobacco in the world with the total production of 249 million pounds in 1972. Currently the country produces sufficient quantity of tobacco to meet the domestic requirement with surplus for export. Out of the total, 60 per cent is consumed by cigarette manufacturing industry and export manufactured form and the rest 40 per cent for commercial purposes. Khyber Pakhtun Khua is the main growing area for Virginia tobacco.

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HISTORY

Its origin in the Indo-Pak Sub-continent could be traced back to 16th century when Akbar the Great, was holding the regions Mogul Empire. Ever since, it has been consumed in different forms, originally as a preservant, then as a medicine and now in the form of smoke through hubble-bubble, cigarettes, cigars and snuff. Despite all the constraints and restraints tobacco still remains a vital cash crop globally.

Before partition, no tobacco was grown in this part (now constituting Pakistan). It was after substantial efforts that production of flue-cured Virginia tobacco was first tried in low Indus basic; then its production moved northwards to the Punjab plains and finally the movement was towards the North-West Frontier Province at altitude comparable with the old tobacco belt of USA in North Carolina, South Carolina and Georgia.

In 1947, all Tobacco was imported to meet the requirement of the country. However, cultivation of flue-cured Virginia was started on tentative basis over about 20 acres in 1948. During the 1950’s, Pakistan used to import tobacco for meeting the demand of its cigarettes industry. [2] The cultivation of Flue-Cured Virginia tobacco was introduced in Pakistan in 1948 by a leading multinational. Commencing with a mere 20 hectares the crop size was gradually expanded to over 34,600 hectares producing over 78.3 million Kgs. in 2000.

Prior to 1968, the tobacco cultivated was of inferior quality and the industry was dependent on imported raw materials on which a huge amount of foreign exchange was spent every year. In 1968, the government decided to promote the cultivation, manufacture and export of tobacco and tobacco products on a controlled basis, through the establishment of the Pakistan Tobacco Board. Pakistan Tobacco Board (PTB) is responsible for rules and regulations regarding tobacco industry. The core functions of this body are to protect the rights of stakeholders, buyers, growers, dealers etc., to maintain a balance between demand and supply for tobacco (crops) by the companies. It takes into account different aspects including crop sizes, exports, domestic usage, prices, cultural operations, plant protection measures etc. A special technical Committee comprising of all stakeholder and members of the body set the minimum and floor prices for the purchase of the tobacco crops for the domestic firms.

Had the production of tobacco crop not been developed by the Pakistan Tobacco Board on scientific lines, the country would have been importing raw materials worth Rs10 billion per annum.

With a view, to reducing dependence on the import of good quality tobacco leaf, the Pakistan Tobacco Board, in collaboration with the tobacco companies, build up research and development activities and explored the soil and climatic conditions in the sub-mountainous areas of Mansehra, Buner, Swat and Dir districts to meet the quality requirements of cigarettes for domestic use. The local oriental types of tobaccos are cultivated in the plains of NWFP and, to some extent, in the provinces of Punjab, Sindh and Balochistan. Punjab is, however, famous for the production of dark air cured and hookah type tobaccos. At present, all the tobacco consumed by the tobacco companies for cigarettes is produced in the country except for a nominal quantity which is imported for use in superior brand of cigarettes.

And, self-sufficiency in tobacco for use in low brand cigarettes was attained during 1969 through 1971, but the country used to import large quantities of good quality tobacco for use in superior brands of cigarettes. [3] 

SIGNIFICANCE

 The area under tobacco cultivation is over 51000 hectares with a production of over 103300 tonnes. It is also of great significance as it is a source of revenue, employment and foreign exchange earnings to the country.

Employment generation

Tobacco is an important source of employment and income not only in Pakistan but also in over 120countries where it is grown. Tobacco industry – growing, manufacturing, distribution and retailing employs over one million persons directly or otherwise. This translates in the full time equivalent of 312,500 jobs supporting approximately 1.2 million persons. The industry contributed 4.4 per cent or over Rs 27.5 billion to the total GDP of Pakistan. Out of the 51000 hectares, 30800 hectares were planted in NWFP. Its value of export was 570.2 million rupees which is 0.44% share in all crops exports of Pakistan. (Federal Bureau of Statistics, 2008). Cigarettes & tobacco gave 30.6 billion rupees indirect taxes which are 5.4% shares in gross (Federal Board of Revenue, 2008).It is the single biggest contributor of excise duty, six-times than that from cotton yarn. Over 5 per cent of all taxes collected in the country comes from the tobacco industry.

It is the most widely grown among the non-food crops, yet it occupies a mere 0.3 percent of the world’s arable land compared with 0.7 percent for coffee and 2 percent for cotton. Tobacco creates more employment per hectare of cultivated land than any other crop in the world and the returns generated are significantly higher as compared to other crops.

Revenue Generation

It is an important source of foreign exchange earnings for the country (Rs.286 million during 2001-02). Pakistan’s tobacco industry has been a traditionally dependable source of government income, contributing some 27.5 billion rupees per year – the equivalent of 4.4% of Pakistan’s GDP. During 2007-2008, above Rs.36.3803 billion were contributed to the Federal Exchequer as Central Excise Duty and Sales Tax. This industry provides largest contribution terms of taxes (i.e. 5% of the all taxes received) and excise duty. The 2005-06 Excise and Sales Tax revenue from cigarettes totalled Rs. 29 billion. Tobacco industry is contributing 40 percent of all excise revenue collected in the country making the single largest contributor to the excise duty.

Being a highly labour-intensive crop, about eighty thousand persons are involved in its cultivation, fifty thousands are engaged in 26 factories of the Tobacco Industry and another one million find indirect employment. It is also an important source of foreign exchange earnings for the country (US$ 5.676 million during 2007-2008).

Cigarettes 40%

Cement 24%

Beverages 6%

Natural Gas 10%

P.O.L. Products 11%

Other 9%

Anti-tobacco campaigners charge the government of being swayed by the tobacco industry. According to independent estimates, the Pakistani government collected over $300 million in tobacco tax in 1990, slightly more than a tenth of the government’s total revenue earnings that year. Anti-tobacco activists say that whatever benefits the government is reaping in the short term from tobacco-related industries will be significantly offset by the long term health care problems of average Pakistanis devastated by smoking addictions. [4] 

Tobacco is a crop that possesses numerous aspects. It involves scientific treatment and requires special attention by producers during the growth, curing and marketing stages. On an economic front, this crop plays a valuable role and its impact on major producing countries’ exports is pronounced.

5

PORTER’S DIAMOND MODEL

FACTOR CONDITIONS

In the year 1948 plantation of Virginia tobacco started in the country and slowly reached its peak of production by producing 80 million pound crop of Virginia tobacco and Pakistan became the fifth largest producer of all types of tobacco in the world with the total production of 249 million pounds in 1972.

For proper regulation of tobacco marketing, the Pakistan Tobacco Board ascertains the requirements of various tobacco companies for different types of tobacco from the ensuing crop, and publicises the same at the time when nurseries are being laid out. The underlying idea is to create an awareness of the manufacturers’ requirements among the growers so as to aim at a crop-size bearing a relationship with the demand.

Following are the major types of tobaccos grown in Pakistan:

Flue-cured: Popularly known as Virginia, is mainly grown in Khyber Pakhtunkhwa and Punjab, with basic usage in cigarettes. It requires loamy soil for cultivation and period of cultivation is from March to September.

Dark-air cured: Usually known as Dark Virginia, is grown in Gujrat, Mandi Bahauddin, Okara and Vehari districts of Punjab Province, with basic usage in cigarettes. It requires light loamy soil and the growth period is from February to October.

Light-air cured: Commonly known as Burley, is grown in Swat (Khyber Pakhtunkhwa), with basic use in cigarettes. It requires sandy to sandy loam soil, and the growth period is from March to October.

Semi-oriental: Popularly known as White Patta, is grown in Khyber Pakhtunkhwa, with basic usage in cigarettes, Biri chewing and Hookka. It requires loamy soil. The growing period is from December to May.

Light-sun cured: Popularly known as Hookah, is grown in Punjab and Sindh, with basic use in Hookahs. It requires loamy soil. The growing period is from February to May.

Dark-sun cured: Generally known as Naswar, is grown in Hazro (Attock), Jampur (Rajanpur), Dera Ghazi Khan, Mailsi (Vehari) districts in the Punjab Province, Bubak/Rasoolabad areas, district Dadu in Sindh province and Pishin/Qila Saifullah districts in Balochistan Province with usage in Snuff. It requires loamy soil. Growing period is February to May in Punjab, December to April in Sindh and April to October in Balochistan.

The ultimate sale of tobacco is regulated through the provincial law in NWFP under which the tobacco companies are bound to execute agreements with tobacco growers in prescribed format for their total demand of Virginia tobacco. The companies are also bound to purchase at least 35% of their indicated requirements of white patta tobacco from the growers. The process of execution of agreements is completed by Dec. 31. The plantation of tobacco starts in the second week of February in the plains and during the month of March in the ousub-mountainous sub·mon·tane  

adj.

Located under or at the base of a mountain or mountain range.  areas of Mansehra, Dir, Swat Swat (swät), district of the Malakand division, North-West Frontier Province, Pakistan. Saidu Sharif is the capital. The largely inaccessible region is reached by air and through mountain passes from the south and east.  and Buner. The growers start supplying the tobacco of agreed quality to the tobacco companies in the month of July which remains up to the end of October. Inputs like fertilizers, pesticides and fire-wood are necessary after the plantation of crop.

The tobacco growers have been constantly pushing on the fact that since tobacco is a highly labour-intensive and cost-oriented crop, therefore, the banks should give agricultural production loans to tobacco growers against the agreements executed with them by the tobacco companies. Tobacco is a special crop that requires intensive labour, input as well as fuel-wood for the curing of leaves. The banks usually start disbursing of the agriculture loans for Rabbi Season from September 15 which goes up to March 15. Tobacco is included in the Rabbi crops, its cultivation starts from about mid Feb. after the loaning is almost completed by the banks. Therefore, even if the tobacco growers have been given the loans, they spend the money in most cases for other purposes. The tobacco companies execute agreements @2100 kgs per bam for flue-cured Virginia tobacco which requires an area of one hectare. Since the cost of production of tobacco is very high in comparison with other cash crops, it is proposed that 50% of the borrowing limit should be booked for a grower who produces agreement of one barn executed by him with a tobacco company. Hence the money reserved for loaning to tobacco growers should not be disbursed before the first week of February.

The agricultural loans given to the growers of tobacco crop in this manner could be recovered within a period of six months. The recovery of loans will be assured since all the transactions between tobacco companies and growers are carried out through banks on vouchers issued by the companies.

Therefore, a special scheme on the line of ‘Deferred Payment Leaf Voucher Scheme’ which is already in vogue and has been appreciated by the banks. The scheme will make tremendous contribution towards the economic boost of the growers. The agreement between the tobacco companies and tobacco growers will be treated as a bonafide document for the grant of loans. The loans could be recovered from the growers through vouchers cashable at the designated banks in the manner specified hereunder Adv. 1. hereunder – in a subsequent part of this document or statement or matter etc.; “the landlord demises unto the tenant the premises hereinafter called the demised premises”; “the terms specified hereunder”

hereafter, hereinafter

2. : –

a) First Voucher: 50% of cash value of voucher to WARRANTY, VOUCHER TO, practice. A warranty is a contract real, annexed to lands and tenements, whereby a man is bound to defend such lands and tenements from another person; and in case of eviction by title paramount, to give him lands of equal value.

     2.  be paid to the growers and 50% adjusted against the loan.

b) Second Voucher: 25% of cash value of voucher or balance of the loan to be paid to the growers & 75% to be adjusted against the loans.

c) Third Voucher: 25% of cash value of voucher or balance of the loan to be paid to the growers & 75% to be adjusted against the loans.

d) Fourth Voucher: The outstanding balance of loans, if any, shall be recovered in full to settle the total loan amount.

Cost of Production of Cured Leaf Per Hectare (Rs.)

Type of tobacco

Labour/Others

Fertilizers

Pesticides

Fuel-wood

Total

Flue-cured Virginia

53776

9228

3366

17480

83850

Dark Air-cured

34065

6725

1650

–

42440

White Patta

34671

8157

620

–

43448

Burley

58611

11659

3525

–

73795

Tobacco has the highest yield than any other crop and is the only crop grown in Pakistan whose yield is well above the world average and matches the per hectare yield in the US and other developed countries – an average yield of 1,900 kilograms per hectare.

Yield

1994-95

1995-96

1996-97

1997-98

1998-99

FCV

2073

2163

2520

2372

2442

WP

1799

1863

1899

1812

1877

DAC

2147

2622

3044

2976

3076

BURLEY

2145

1911

1592

2200

2150 [6] 

The area under tobacco cultivation increased by 30 per cent during 1990-91 to 1998-99 – from 44,000 hectares to 57,000 hectares.