ACCELERATING PROGRESS ON EFFECTIVE TOBACCO TAX POLICIES IN MONTENEGRO 4/6/2019 ACCELERATING PROGRESS ON EFFECTIVE TOBACCO TAX POLICIES IN MONTENEGRO

Our Team Mirjana Čizmović, PhD Senior researcher Mugoša Ana, PhD Project Director Faculty of Economics, University of Montenegro Milenko Popović, PhD Project Coordinator Tanja Laković, PhD Senior researcher ISEA – Institute for Socio- Economic Analyses & Montenegro Business School, Mediterranean University ISEA – Institute for Socio- Economic Analyses & Montenegro Business School, Mediterranean University Faculty of Economics, University of Montenegro

National Study outline 01 Macroeconomic indicators 02 Tobacco market – supply and demand 03 Tobacco taxation and pricing policies 04 Price elasticity of tobacco products

Macroeconomic indicators ACCELERATING PROGRESS ON EFFECTIVE TOBACCO TAX POLICIES IN MONTENEGRO

Macroeconomic indicators – Real sector 4/6/2019 Upper middle income country Macroeconomic indicators – Real sector Real sector Indicators 2012 2013 2014 2015 2016 2017 GDP in current price (mil EUR) 3,181 3,362 3,458 3,655 3,954 4,237 GDP real growth in % -2,7 3,5 1,8 3,4 2,9 4,3 GDP per capita 5.126 5.412 5.561 5.826 6.354 6.833 GDP per capita PPP (international dollar) 13,990 14,666 15,353 16,123 17,022 18,765 CPI annual growth at the end of the period in % 5,1 0,3 -0,3 1,4 0,9 1,9 Number of employees 201,000 201,900 216,300 221,700 224,200 229,300 Unemployment rate 19.7 19.5 18 17.6 17.7 16.1 Average monthly gross wage 727 726 723 725 751 765 Average monthly net wage 487 479 477 480 499 510 FDI mil € 461,6 323,9 353,9 619,3 371,6 474,3 FDI (% GDP) 14.5 9.6 10.2 16.9 9.4 11.2 Population: 620 029 (2011) Surface area: 13,812 km2 Capital city: Podgorica strives to join EU by 2025 Average inflation rate was 2.4% 3.1% in 2018

ACCELERATING PROGRESS ON EFFECTIVE TOBACCO TAX POLICIES IN MONTENEGRO Tobacco market ACCELERATING PROGRESS ON EFFECTIVE TOBACCO TAX POLICIES IN MONTENEGRO

Level and Dynamics of Tobacco Growing and purchase (1992-2017) Tobacco market - supply Level and Dynamics of Tobacco Growing and purchase (1992-2017) .

Tobacco market - supply Level and Dynamics of Cigarettes production (2000-2016) and employment (2002-2017) . Cigarettes production Employment in manufacturing

Import and Export of tobacco products (2005-2017) 4/6/2019 Tobacco market - supply Import and Export of tobacco products (2005-2017) .

Significant decrease of prevalence comparing 2000 Tobacco market – Demand Significant decrease of prevalence comparing 2000 Smoking prevalence (2000, 2008, 2012, 2017) Increasing trend of adult smoking prevalence for 5% 2012-2017 No of cigarettes used daily 2012 67% of active smokers 20 or more cigarettes 2017 50% active smokers 10 to 20 cigarettes 33.4% smokes more than 20 cigarettes

Smoking prevalence adults, young (ESPAD 16 years and GYTS 13-15 year) Tobacco market – Demand Smoking prevalence adults, young (ESPAD 16 years and GYTS 13-15 year)

Consumption Consumption Dynamics (number of used excise stamps 2006-2017) Yearly value of retail sales in EUR

Consumption per adult smoker and WAPC dynamics

Regulatory framework - Tobacco taxation and pricing policies ACCELERATING PROGRESS ON EFFECTIVE TOBACCO TAX POLICIES IN MONTENEGRO

4/6/2019 Strategies National Strategy for Sustainable Development until 2012 National Strategy for Sustainable Development until 2030 Healthcare Policy of Montenegro by 2020 National Strategy for Tobacco Control Strategy for Prevention and Control of Chronic Non-communicable Diseases Strategy for Healthcare Development in Montenegro National Strategy for Eliminate Illicit Trade in Tobacco Products 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Law on Healthcare Inspection Law on Fees for Access to Services of General Interest and for the Use of Tobacco Products, Electric –Acoustic and Acoustic Devices Law on Healthcare Law on Limiting Use of Tobacco Products Law on Excise Taxes Law on Fees for the Use of Tobacco Products, Electric- Acoustic and Acoustic Devices Law on Tobacco Law on Value Added Tax Law on Ratification of the Framework Convention of the World Health Organization on Tobacco Control Law on Ratification of The Protocol to Eliminate Illicit Trade in Tobacco Products Legislation

Law on Limiting Use of Tobacco Products Regulatory framework Laws 2001, 2005, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2017, 2018 Law on Excise Law on Tobacco (2004, 2008, 2011, 2015) Law on Limiting Use of Tobacco Products (2004, 2011, 2016) . The Law on Fees for Access to Services of General Interest and for the Use of Tobacco Products, Electric-Acoustic and Acoustic Devices (2012, 2013, 2015) The Law on Fees for the use of Tobacco products, Electric-Acoustic and Acoustic Devices (2017)

Specific and Ad valorem statutory excise rates on cigarettes in Montenegro 2006-2018 Increase of excise taxes until 2018 From 1st september changes in excise calendar – decrease of specific excise from 40 to 30 euros Excise policy for 2018-2023: increase of specific excise yearly by 3.5 euros, while decreasing Ad valorem by 1.5% Specific excise - 30 euros on 1000 cigarettes (36,67% of WAPC) Ad valorem - 32%.   Overall or minimal excise is 63,5 euros on 1000 cigarettes (EU directive: 90 euros). Overall or minimal excise per pack of cigarettes is 1.27 euros (EU directive 1,8 euros). WAPC 2.1 euros in MNE – EU average 4.8 euros.  

Pricing policy – impact of taxes on price Tax burden in price : from 43.8% to 87.43% (2006-2018) Tax burden currently: 77.9% Tax burden in price of cheapest cigarettes (2 euros per pack): 79.35% Tax burden in price of the most expensive cigarettes (3.7 euros per pack): 65.56%

Price elasticity of tobacco products ACCELERATING PROGRESS ON EFFECTIVE TOBACCO TAX POLICIES IN MONTENEGRO

Research objective The primary objective of this part of the study is to estimate the price elasticity of cigarette demand, as an important input for a tax policy targeted to reduce tobacco consumption. We conducted two analyses based on different level of data aggregation: Estimation of price and income elasticity of cigarette demand using a sample of available annual time series of secondary aggregate economic data related to the tobacco market in Montenegro from 2001 to 2017 (macro - level analysis). Estimation of price and income elasticity of cigarette demand based on the Household Budget Survey (HBS) data for years from 2006 to 2017, provided by Statistical Office of Montenegro - Monstat (micro-level analysis).  

Macro analysis – time series Results Results of the macro analysis indicate that the value of price elasticity in long-run is –0.68, while price elasticity for the short-run is estimated in a range from – 0.46 to -0.52. This means that other things equal, 10% increase in price will lead to a 6.8% decline in cigarettes quantity demanded in long-run. Empirical results suggest that in the long and short run in Montenegro the demand for cigarettes is affected by changes in prices and that this responsiveness is in range with the results obtained in similar researches done for low and middle-income countries

Micro analysis – HBS As a theoretical and methodical foundation, we used Deaton’s (1988) demand model and Household Budget Survey (HBS data) from 2006 to 2017 to estimate the elasticity of cigarettes demand in Montenegro exploiting time and spatial price variation. The total sample for the regression analysis that includes households that reported expenses on cigarette consumption amounts to 5,775 households. The data from the survey are broken down by household characteristics, such as income, socio-economic characteristics, size and composition, and municipality. Regional variations

Micro analysis – HBS Results The results indicate that both unit values and budget shares show considerable regional variation in Montenegro. Households in the North Region paid the lowest prices of cigarettes, followed by households in the Central Region, while the households in the South Region paid the highest price. The lower unit value is associated with larger households, as well as households with more women and elderly people. The education had no effect on the unit value. Households with higher levels of total expenditure and households with a lower level of mean education spend a lower share of their budget on cigarettes. Conversely, smaller households and households with higher shares of men and adults spent a larger share of the budget on cigarettes.

Micro analysis – HBS Results Price elasticity of the cigarettes consumption -0.619 total expenditure elasticity of the cigarettes consumption 0.232 Estimated price elasticity of demand for cigarettes among the smokers is negative, statistically significant, and amounts -0.619. This means that if cigarette prices in Montenegro increase by 10%, the quantity demanded of cigarettes will decrease by 6.19%. The estimated value of total expenditure elasticity is positive and amounts 0.232. This means that 10% higher total expenditure among the households which consume cigarettes is associated with 2.32% higher demand for cigarettes. These results are in line with previous estimates in low- and middle-income countries.

Conclusion Results of the estimation indicate a price elasticity of cigarettes ranging from -0.619 to –0.68, depending on the methodology and sample used. The results of this research confirm that an increase in tobacco excise taxes will lead to a decrease in tobacco products consumption Research also points out that an increase in income could, to a certain extent, neutralize the effects of price increases The strategic planning of tobacco tax policy could benefit from the results of this scientific research, using it as an important factor in the decision-making process, as an increase in the standard of living could potentially neutralize the effects on tobacco tax increases.

Conclusion Scenario 1: Increase of specific excise from 30 euros to 40 euros on 1000 cigarettes Increase of ad valorem by 2 percent Price increase by 12.3%, consumption decrease by 7%, public revenues growth by 8%. Scenario 2: Increase of specific excise from 40 euros to 50 euros on 1000 cigarettes Price increase by 23.8%, consumption decrease by 14%, public revenues growth by 12.35%. under no changes in excise taxes (specific and ad valorem), taking only the effect of income, we would have not so significant changes: the increase in consumption, total excise, VAT and total tax revenues by 0.81%.

Recommendations Aiming toward the increase in excise taxes (especially specific excise since it has a relatively greater impact on consumption) which will cause the price increase and consequently the decrease in tobacco consumption and increase of public revenues; Compliance with EU Directives and WHO Framework; Using revenues from excise tax increase to invest in health programs; Decreasing the prevalence of youth by the increase in excise taxes and creation of strategies and effective programs which will target youth.

Recommendations Developing regional tax harmonization - harmonize taxation policy process and limit incentives for cross-border transactions; Tobacco tax systems should be structured to minimize the costs of compliance and administration in process of tax compliance and collection of tax revenues, while reducing tax evasion and the risk of illicit trade; Creating more intensive interaction between key stakeholders in order to more effectively implement tobacco taxation and control policy; Creating positive effects of fiscal measures applied through comprehensive approach - tackling other policy changes and tobacco control systems (more efficient law enforcement, anti-tobacco campaigns, stricter controls of points of sales etc.);

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