Improving tobacco tax policy in the Republic of Macedonia ACCELERATING PROGRESS ON EFFECTIVE TOBACCO TAX POLICIES IN LOW AND MIDDLE-INCOME COUNTRIES Improving tobacco tax policy in the Republic of Macedonia

Tobacco cultivation in Republic of Macedonia The country has long history and tradition of cultivating and exporting raw tobacco (90% of tobacco has been exported to the world market and the remaining 10% is used in domestic production of cigarettes) The area under tobacco currently occupies 3.4% of total arable land and over 70% of the total area planted with industrial crops There has been on average 33,000 registered tobacco farmers per year. This number represents around 6.6% of total households in Macedonia Republic of Macedonia is a unique example of having dual tobacco control policies: it restricts smoking in public places in accordance with EU regulations and at the same time provides high agricultural subsidies aimed at stimulating tobacco production Nevertheless, the data suggests that despite the increasing amount of government subsidies to tobacco farmers, the production of fermented tobacco leaf and the number of tobacco farmers has been declining in the last few years

Tobacco cultivation in Republic of Macedonia The charts shows the annual tobacco leaf production, in tones, for 2000-2017 The largest drop in production was in 2008 coinciding with the global economic crisis By 2010, the production had recovered, reaching its maximum, after which it continued to decline Source: State Statistical Office of Macedonia

Production, export and import of cigarettes Source: State Statistical Office of Macedonia The chart shows the production, export and import of cigarettes (in mill.sticks) Domestic production and export of cigarettes has been oscillating around declining trend, especially since 2011 Import of cigarettes has been increasing, suggesting that domestic brands have been substituted for the imported foreign brand cigarettes

Smoking prevalence in Macedonia According to Tobacco Atlas, Macedonia ranks among the top ten countries worldwide, based on annual cigarettes consumption In 2017, with a total number of 571,000 smokers, smoking prevalence stands at around 35% WHO Tobacco control fact sheet for Macedonia suggests that within 15 years: smoking prevalence can be reduced by 17.9%, by increasing the excise share in the cigarette price from its current level of 58.8% to 75% smoking prevalence can be reduced by 37%, with stronger set of policies consistent with WHO FCTC almost 139 000 deaths could be averted (http://www.euro.who.int/__data/assets/pdf_file/0011/312599/Tobacco-control-fact-sheet- TFYRofMacedonia.pdf?fbclid=IwAR3V8UnJZ9Pb7pfhUZv4ron06Hs8oyFQHC6_8FXwkKogpl2bZFVO2aKz EKg)

Smoking prevalence: male and female Source: Author calculations based on sources on data from Institute for Public Health, IMEX DATA dooel Skopje estimates, Global Journal of Medicine and Public Health; http://www.gjmedph.com/uploads/O3%20-Vo3No4.pdf;http://iph.mk/wp- content/uploads/2016/12/ESPAD-izvestaj-final-final.compressed.pdf Smoking prevalence realizes a moderately declining trend during the period 2003- 2017 In 2017, out of the total number of smokers in Macedonia 304,000 were men and 267,000 were women, Smoking prevalence among men was higher - 37% and lower among women -32%

Consumption of cigarettes The chart shows the annual consumption of cigarettes per capita for the period 2001-2017 Consumption of cigarettes has been relatively constant with certain oscillations in between In 2006, a decline was evident in annual consumption of cigarettes per capita, after an increase of 21.6% in tobacco products price due to 10% increase in excise tax and introduction of a new fee of MKD 0.15 per piece for each manufactured or imported cigarette (i.e. MKD 3 per pack) The annual per capita consumption of cigarettes in Macedonia in 2017 is 2704 cigarettes Source: Ministry of Finance

Consumption of cigarettes among children and youth Particularly worrisome is the consumption of cigarettes among youth and minors According to European School Survey Project on Alcohol and Other Drugs (ESPAD) study, the percentage of minors (aged 16) who have smoked at least once in their lifetime in 1999 is 57.6% in 2008 is 47.9% in 2012 is 41.9% in 2015 is 38.4% According to Tobacco Atlas fact sheet for 2015, percentage of children (aged 10-14) using tobacco daily is: boys – 1.49% girls – 1.35% More boys and girls smoke in Macedonia than on average in high- HumanDevelopmentIndex countries

Taxation of tobacco products (cigarettes) The Excise Law regulates taxation of tobacco products Currently, taxation of tobacco products includes excise tax (specific excise and ad-valorem) and Value Added Tax (VAT) VAT charged on tobacco products is 15.25% of the retail price Ad valorem excise is 9% of the retail price, Specific excise (absolute amount per unit) is gradually increasing until 2023 under the Excise Law The overall excise burden in 2017 amounts to 39.4 EUR per 1000 cigarettes (or 0.78 EUR per pack) and 58.8% of the average retail price This is far below the WHO benchmark of 70%, and below minimum EU prescribed excise burden of 90 EUR per 1000 cigarettes (1.8 EUR per pack) The first significant changes in the Excise Law related to excise rates to tobacco products started in 2013 and its impact is set to have effect until 2023 The most significant increase in the total excise burden by 24% was in 2013

Tax structure of cigarette price The chart shows the tax structure of cigarette price It is evident that until 2012 ad valorem excise had dominant share in the cigarettes price, while starting from 2013 specific excise is with highest proportion in the price Source: Ministry of Finance

Tax burden of different cigarette brands Source: State Statistical Office and Ministry of Finance Among the three brands presented in the chart, Premium brand has the highest net-of-tax price, but only slightly higher total tax (in MKD per pack) relative to other two brands. There is a room for increasing the price by increasing the excise burden on economy and most popular brands, so as to be closer to premium brands and to limit the space for downwards substitution from the premium to the standard brands

Consumption of cigarettes vs. average price of cigarettes This chart indicates that higher increase in the price of cigarettes can lead to significant decline in cigarette consumption Source: Ministry of Finance and State Statistical Office

Excise Revenues from tobacco products Significantly increasing trend of the excise revenues between 2000 and 2017 Over this period, the participation of excise revenues in the consolidated national budget and GDP have doubled Tobacco products excise revenues in 2017 participate with 6.1% in the consolidated national budget and 1.8% in GDP. Source: Ministry of Finance

Price elasticity of demand for cigarettes – Empirical analysis Theoretical framework The law of demand The conventional demand model for tobacco products: Static model Function of tobacco price, prices of close substitutes and complements and consumer’s disposable income

Consumption of cigarettes Source: Statistical Office, Ministry of Finance and authors own calculations

Price elasticity of demand for cigarettes – Empirical analysis Where i and j denote different tobacco products; t stands for a time period; Qit – per capita consumption of product i Pit – the real price of product i Pjt – the real price of product j Yt – real disposable income per capita Zt – tobacco control policies (other factors that might affect the consumption of tobacco product i)

Empirical Analysis Dependent variable Ct – aggregate consumption of cigarettes Independent variables Pt – tobacco CPI Index (proxy for price) α1 – price elasticity Yt – real average wages α2 – income elasticity Policy – adoption of the Law on protection of smoking in 2010) Note: price of complementary and substitutes tobacco products is not included due to statistical limitations

Autoregressive Distributed Lag Model ARDL (1 0 0) – Empirical results Coef. Std. Err. t P>t Adjustment speed of adjustment -0.90 0.14 -6.56 0.00 Long run ln(price) -0.37 0.13 -2.79 0.02 ln(wage) -0.16 0.25 -0.64 0.54 Short run law2010 -0.27 0.07 -4.08 dum2014_14 -0.24 0.05 -4.50 _cons 7.71 2.17 3.55 0.01

Autoregressive Distributed Lag Model ARDL (1 0 0) – Diagnostic tests Pesaran, Shin and Smith (2001) bounds test p value (F-stat) 0.004 H0: no level relationship p value (t-stat) 0.002 Ramsey RESET test H0: model has no omitted variables p value 0.172 Durbin – Watson test H0: no serial correlation 0.706 Jarque – Bera normality test H0: normality in the residuals 0.886 Breusch–Pagan/Cook–Weisberg test for heteroskedasticity H0: constant variance 0.271 Hausman test H0: difference in coefficients not systematic 0.999

Increase of excise tax and tax revenues Three scenarios 10% cigarette price increase due to increase in the excise tax; 30% cigarette price increase due to increase in the excise tax; 50% cigarette price increase due to increase in the excise tax; Use of the ARDL long run coefficients Assumptions The price of BOSS cigarettes Price increase is due to higher excise taxes The impact on government tax revenues is analyzed considering the estimated price elasticity to the consumption using excise tax revenues data; 0.1% growth of the working age population The income effect on consumption of cigarettes is considered Ceteris paribus

Scenario Simulation Results Price of Boss cigarettes (per pack in MKD) Effective excise 0.9% from the retail price + per cigarette excise Consumption of cigarettes (per capita) Decrease in consumption of cigarettes (per capita in %) Excise tax revenues (in million MKD) Increase in excise tax revenues (in %) 2017 82 48 2,704 11,011 Scenario 1 91 57 2,591 4.2 12,518 13.7 Scenario 2 107 66 2,388 11.2 15,148 37.6 Scenario 3 124 2,185 19.2 17,165 55.9 Main results: The consumption of cigarettes will decline between 113 to 519 cigarettes per capita, or between 4.2% and 19.2%. Government excise revenues will increase between 24.5 and 100 million EUR, which is between 13.7% and 55.9%.

Main Results Empirical Analysis Scenario Analysis 1% increase in the price of cigarettes will decrease the consumption of cigarettes by 0.4% The adoption of the Law on protection of smoking in 2010 reduces the consumption of cigarettes by 0.3% 90% of the deviation from the long-run equilibrium will be corrected in the following year. As argued by Ross & Al-Sadat (2007) this fast adjustment actually comes from the addictive nature of tobacco use Scenario Analysis The cigarette consumption will decline between 4.2% and 19.2% due to increase in excise tax The government will receive higher excise revenues between 13.7% and 55.9% (or additional revenues in the range of 24.5 to 100 millions of EUR) due to increase in excise tax

POSSIBLE MEASURES FOR IMPROVEMENT OF TOBACOO TAX POLICY Based on Analytica’s data analysis: an increase in the price of cigarettes would have beneficial effects in both reducing consumption and generating new excise revenues tobacco control policies are important in reducing tobacco consumption government policy should focus on tax increases that result in significant price increases The new strategic framework should contribute to more dynamic alignment of the national legislation with the current EU legislation, in regards to excise rates All actors to be involved in creating and implementing a new tobacco control policy (Ministry of Health, Ministry of Finance, Customs Administration, Institute for Public Health, civil society) All data on tobacco control should be regularly collected and publicly available to enable evidence - based research in the field

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