Among the stars of the June LSM numbers is the tobacco sector. After a considerable lull, the cigarette production is aiming to approach the usual output level of 5 billion sticks per month. As per the PBS’ latest statistics, about 4.6 billion sticks were produced in June 2020 – that figure is up more than four times the same month last year. And that makes it the first growth month for smokes this calendar year.
In total, the formal sector produced 24 billion sticks in the first six months of 2020 – this is down a fifth, or six billion sticks short, over the same month last year. If the June output holds up in subsequent months and nears the 5-billion-stick per month average, it should provide succor to the LSM growth in 1HFY21 on account of the low-base effect. Question still is: what is really going on to bring the output back to normal?
Data suggest that in the past when unfavorable budgets were in the offing (from the tobacco companies’ perspective, a higher FED would be undesirable), output used to first go up in the months leading up to June announcement and then immediately crash in June. This June, the speculative activity seemed absent, as the budget went quietly for tobaccos – no noticeable FED increase or new slab.
That finding is consistent because there is no significant change in output despite the coronavirus pandemic locking things down. For instance, manufacturing totaled 11.6 billion sticks in Jan-Mar period before the virus hit; during the periods of varied lockdown, in the Apr-Jun period, production accumulated 12.2 billion sticks. The monthly average of 4 billion sticks holds up for both prior and during coronavirus.
Production resuming normal order is good news for business and good for tax revenues. But it still raises a question relating to the industry’s recent argument that illicit cigarette trade had grown to more than a third of all cigarette sales taking place in Pakistan. (Health activists argue that illicit cigarettes have a 10 percent market share).
And the intrigue is this: how can it be that the tobacco industry is able to recover the volumes, or “lost ground”, from duty-evading informal sector when a) there is no noticeable change in FED structure and b) there have no meaningful law enforcement actions reported to have curbed illicit sector activities of late? In the past, a major FED change used to bring normal output back on track after a slump. Now, it seems the status quo is back on its own.