Let's roll or quit: Cigarettes prices take toll on Egyptian smokers

Menna Alaa El-Din , Wednesday 19 Oct 2016

The country's dollar crisis and new value added tax has led many popular brands of cigarette to disappear from the stands; government, big tobacco and vendors point fingers at one another


“Take this. Slide it quickly in your bag before anyone sees us,” a shopkeeper at a popular gas mart in Cairo which sells cigarettes tells a shopper.

“Trust me, it’s easier to get drugs in Egypt now than to find your preferred choice of cigarette,” the shopkeeper answers when asked by the next shopper about what had just taken place.

This exchange took place at an On-the-Run gas station in July, when smokers started to notice the disappearance of their favourite cigarette brands from the shelves, and started resorting to alternatives in what they considered a temporary fix until the shortages end.

They did not. They continue.

The availability and affordability of tobacco on the market has been hit, like other commodities, by economic troubles.

The foreign currency shortage the country has been facing in the past five years , which has become more severe in recent months, led to a drop in the levels of imports of tobacco among many other imported goods.

Months of 'withdrawal'

Over the past four months, Egyptian smokers - numbering in the millions - have been fuming "amid confusion over unofficial and unexplained whopping price hikes of several brands of cigarettes, with official efforts to control prices minor," sources in tobacco companies told Ahram Online on condition of anonymity.

The “farce,” as several smokers interviewed by Ahram Online put it, has made them consider quitting smoking altogether if prices continue to rise, especially after cigarettes prices had already risen twice in the last two years, first in July 2014 and February 2015.

When the problem for smokers was beginning to worsen in July of this year, customers were able to buy their preferred cheapest local brand Cleopatra at EGP12 ($1.35 at official exchange rates) and foreign brand Marlboro at EGP 23 ($2.5).

By September, the price of the cheapest local brand increased considerably but the price of a pack for certain foreign brands skyrocketed to EGP35 (around $4) on the black market.

Vendors in kiosks in Downtown’s busy El-Isaaf area recently told Ahram Online, “The government is going to raise the prices again. The tobacco companies are no longer providing us with the quantity we want.”

In July, when the government was still in talks with the tobacco sector about its then-anticipated Value Added Tax (VAT) Law (eventually implemented in September), authorities assured tobacco industry officials that cigarettes would not be subject to any tax increases.

Nevertheless, traders feared that cigarettes would be subject to VAT, leading to a “store and keep” period until their prices are announced.

Smokers and Cleopatra

Three companies are licensed to make and sell cigarettes in Egypt, led by the state-owned Eastern Company, whose cheaper Cleopatra brand has long dominated the market.

Two foreign companies also operate in the local market: BAT-Egypt and Philip Morris International, both of which use Eastern Company factories to manufacture their products.

The cigarettes brands, ranging from Philip Morris’s premium segment of Marlboro/Merit, or Eastern Company’s Cleopatra, are managed individually by each company.

Sources in tobacco companies say they had been expecting the VAT to be applied since May, especially with the finance ministry inviting the companies to talks over how the tax increase would be implemented, and how cigarettes would be priced under the VAT law.

The proposals presented by the companies came in line with what was later announced as the official new price for cigarettes by Minister of Finance Amr El-Garhy, according to an informed source.

The finance ministry listed a set of goods and services that would be subjected to various fixed tax rates, but not to VAT.

Cigarettes are included in this list. They are taxed at a fixed rate of 50 percent of the pack's consumer price, in addition to the following increases:

- Cigarette packs that cost EGP13 or less increased by EGP2.75
- Cigarette packs that cost between EGP13 and 23 increased by EGP4.25
- Cigarette packs that cost more than EGP23 increased by EGP5.25

“No cigarette or shisha [water pipe] tobacco is processed in Egypt except under the authorisation of Eastern Company,” a source at Philip Morris who declined to be identified explained.

Prior to the official increase of premium brands to EGP27 ($3.04) in September, tobacco companies asserted that the official price of packs was EGP23 ($2.59), explaining that retail prices are often raised by vendor “greed”, not the cigarette industry, as a source in Philip Morris put it.

According to CAPMAS in May, 19.6 percent of Egyptians over the age of 15 smoke, and 60 percent of smokers smoke 15 to 24 cigarettes per day.

The dollar crisis

In May, Eastern Company’s chairman Mohamed Osman said that the manufacturing of “foreign cigarette brands” dropped by 50 percent due to dollar shortages in the country, though he asserted there would be no price hikes.

A source at Philip Morris said “If I have millions of Egyptian pounds and I do not have dollars, how will I buy raw material needed to produce the cigarettes?”, explaining that his company faced a 30-50 percent drop in production due to the dollar shortage.

In September, the dollar’s rate on the black market registered almost EGP15, around 71 percent higher than the official rate of the greenback in the Central Bank of Egypt, which stands at EGP8.78.

According to the Eastern Company’s chairman Osman, the company is planning to present a practicability study on the cultivation of tobacco locally to the House of Representatives. The move is aimed at overcoming the challenges of importing tobacco due to the foreign currency shortage.

Eastern Company currently produces 250-260 million cigarettes per day, a number that has been endangered due to the dollar crisis.

Phillip Morris’s Marlboro pack, considered a “premium” product in the industry, witnessed a 170 percent price increase since 2011, jumping from EGP10 ($1.13) per pack to EGP27 ($3.04) today. 

The price of Eastern Company’s best seller, the cheap Cleopatra brand, saw a bump from EGP4.25 ($0.48) to EGP12 ($1.35), an increase of approximately 182 percent over the last five years.

Around 70 percent of the price of cigarette packs is composed of taxes, with the government hitting the industry with tax increases once or twice per year over the last several years.

Burning profits

In 2008-2009, revenues from tobacco sales reached EGP 7 billion, and hit EGP35 billion in 2015-2016, according to a tobacco company source who spoke to Ahram Online on condition of anonymity.

When the new prices were implemented in September, after four months of uncertainties, vendors had had plenty of time to stockpile cigarettes to benefit from the price increase.

“This hurt everyone,” a source at British American Tobacco said.

“The consumer could not find the cigarettes they wanted, even though we were producing them like there’s no tomorrow.”

He added that vendors “made all the profits,” not the government or the cigarette industry.

“Those were six months I hope traders never see again in terms of profit; the industry never saw a share,” he said.

Even after the new official prices were announced – with premium packs at EGP27 – some retailers continued to sell premium packs for EGP28-29, with others claiming they had never participated in artificial price pumping during the months prior to the official increase.

The price of certain brands, including Philip Morris’s Marlboro and Merit, which are among the best selling products in the market for vendors, reached new high levels on the black market.

Until recently, managers at a popular convenience store in a gas station in Dokki said they had strict orders not to sell customers more than two packs of the premium, arguing that they were "still not able to receive enough" of the quantity they need from cigarette distributors.

In recent media reports, Egypt’s Consumer Protection Agency (CPA) chief Atef Yaacoub said the agency was able to observe cigarette pricing violations after the VAT law was ratified, adding that they were currently coordinating efforts with the government to stop traders from exploiting the new tax.

According to Yaacoub, the CPA has sent proposals to the cabinet related to the selling of cigarettes in supermarket chains and government outlets to stop profiteering among kiosk owners whose selll “away from the eyes of the state.”

Yaacoub was not available for comment on the number of violations the agency was able to track, or over the type of legal action that could be taken against violators.

Cigarette vendors are reluctant to admit to having been part of the price pumping scheme.

Not just cigarettes

Amid the dollar shortage, several essential food items have been scarce for Egyptians in the last couple of weeks.

The price of sugar skyrocketed from EGP 5 to EGP 11 ($1.24) per kilo in some areas after the market began to witness a growing shortage in supply, pushing the government to attempt to resolve the issue by importing more sugar for sale on the local market.

Egypt's President Abdel-Fattah El-Sisi ordered authorities to beef-up essential foodstuff reserves to cover six months.

The government has already started a crackdown on traders selling sugar on the black market, with incidents where people were arrested “for carrying too much subsidised sugar beyond personal use.”

Let's roll

With the apparent conflict between vendors, the government and the tobacco industry, Egyptian consumers have started to look for alternatives that would satisfy their craving without hurting their pockets.

Many smokers interviewed by Ahram Online say they have decided to ease their cigarette consumption or change their once premium preferences and opt for cheaper alternatives at EGP19.

“I used to smoke Marlboro, but now I smoke L&M. That’s an EGP 7 difference,” 26-year-old smoker Yasmin, who works as a civil servant, says.

“Imagine how much an EGP 7 difference would make if you buy in bulk.”

Yasmin adds she is considering quitting altogether, a decision that a source in the tobacco industry says would be “catastrophic to the whole industry if taken on a large scale.”

However, other smokers interviewed by Ahram Online said that after realising they spend over EGP 1,000 on cigarettes alone per month, they decided to resort to rolling tobacco.

“I went for rolling cigarettes. It tastes better and it’s cheaper, because it only costs me now EGP 75 for a week or 10 days,” says Abdullah, a 30-year-old surgeon who has been a daily smoker for over two years.

The doctor added that he now smokes less because the process of rolling is not as easy as pulling a ready-made cigarette out of a pack.

A packet of rolling tobacco costs around EGP 65, increasing to EGP 75 if you include rolling papers and filters.

“It is not easy to roll the cigarettes, but they will learn. You would do anything to learn. Smokers do have that in them. Anything to satisfy their cravings,” a vendor who sells rolling supplies in New Cairo said.

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