1. Economics of Tobacco in Serbia after 2000
Institute of Economic Sciences, Belgrade
Belgrade, 11 December 2018

2. Macroeconomic overview
General info
Data
Population (2017)
7,020,858
Gross domestic product, (2017 in millions EUR)
36,795.4
Gross domestic product, per capita, (2017 in EUR)
5,226
Gross domestic product, real growth, (2017 in %)
1.9%
Inflation (2017)
3.0%
Unemployment according to LFS (2018 in %)
11.3%
Average net wage (2018 in EUR)
404 €
Employment level, average (2018)
2,050,000
Smoking prevalence 18+ (2018)
38.9%
indicators: SORS; Ministry of finance, Republic of Serbia
Note:  calculated at the average exchange for EUR in 2017 (121.34)

3. Tobacco farming reduced
Stabilized
Source: Statistical office Republic of Serbia

4. Tobacco farms enlarged

5. Employment in the industry
Major decrease in 2004, a year after the two major privatizations
Second in 2009, as a consequence of layoffs in PMI
Investments in capacities and recent increase of production have not been followed by the significant rise of employment
Source: Statistical office Republic of Serbia

6. Foreign trade of tobacco (t)
Exports to Belgium 90%
Imports
until 2016 Belgium 80%
In 2017 Brasil, Mosambique, Italy and USA share the market
2004 Privatization
2009 No farming subsidies
2010 Discounts on custom duties
2014 Major investments in facilities 1 2 3 4
Source: Statistical office Republic of Serbia

7. Cigarette manufacturing (mil. pcs)
2004 PMI, BAT privatization
2006 Monus greenfield
2007 JTI privatization
growth (50%)
volatility (avg billion)
investments (120%)
Hub for cigarette production in the region (4th in Europe – DE, RU, RO)
Source: Statistics office Republic of Serbia
2014 JTI three major investments
2016 BAT investment
2017 BAT investment
2018 JTI new production line

8. Cigarette foreign trade
Imports and exports of cigarettes recorded variations in trends during the
Import reduced by 50% both in terms of quantities and values
Investments in the tobacco manufacturing and expanding production capacities, created a base for increase of exports.
Exports of cigarettes from Serbia increased from
2.5 mil US$ in 2004
235.1 mil US$ in 2017
Source: Statistical office Republic of Serbia

9. Smoking prevalence Still above 1/3 of population daily smokers
Decrease over time (47% to 39%) – 0.5% annually
Reduced prevalence rate gap between men and women.
Source: Worldbank Database
Note: Age standardized

10. Smoking prevalence facts
28%
39%
41%
44% Unemployed
38% Employed
23% - 60+
Cessation most common for 60+
Prevalence rates increase until the age of 60 and then start declining

11. Cigarettes consumption (excise stamps sold)
Consumption of cigarettes decreased by 20%
Sales volume in 2017 is 671 million packs
Source: Tobacco administration of Serbia, ; Ministry of finance,

12. Institutional, policy and legal framework
Excise Department
VAT Department
Tobacco Administration
Department of budget
The Customs Administration
Ministry of Finance
Ministry of Health
Ministry of Agriculture, Forestry and Water Management

13. Policy framework for tobacco control
Global and EU Conventions and Reports
Framework Convention on Tobacco Controls of the World Health Organization
EU Council Directive 2011/64/EU — structure and rates of excise duty applied to manufactured tobacco
National strategies and plans
The Plan for the Development of Serbia's Health Care – addopted in 2010
The strategy for the prevention and control of chronic non-communicable diseases (CNB)  - proposal for new created in Dec. 2015
The strategy of public health – addopted in August 2018
The Strategy of Tobacco Control proposal for new created in July 2016

14. Relevant legislation for tobacco control
Law on tobacco
Law on excise duties
Law on protection of population from exposure to tobacco smoke
The Law on Advertising
Policy changes
Ban on smoking in public places (since 2005)
Ban on advertising tobacco products (since 2010)

15. Tobacco tax structure Law on excise duties adopted in 2001
Mixed excise system introduced in 2005
Addopted excise calendar until July 2020
Source: Serbian Excise law

16. Excise calendar (in US cents)
Rate
WAPC
2018
Structure
Annual incrementals
Incremental structure
Price
2.28
0.20
VAT (20%)
16,77%
0.38
0.03
Specific Excise
0.68
50%  
Ad valorem
33%
0.75
0.07
Total tax
1.81
80%
0.13
65%
Net-of-tax
0.47
20%
35%

17. Tobacco tax revenues
5.4
5.3
5.1
5.0
4.2
3.3
2.5

18. Impact of tobacco price on demand of cigarettes
Source: Serbia Excise law and other by-laws regulating the price of most popular brand and weighted average price.
Notes: Ad valorem and value added tax calculated based on price of most popular brand through the end 2011, and on weighted average cigarette prices starting from 2012.

19. Elasticity estimation
Two models
Aggregate time series ( )
Individual HBS data ( )
Limitations
short time series period in agg. model (15 observations)
not capturing illicit trade in agg. model
GDP/capita not measuring real income in agg. model
Capturing only cigarettes in agg. Model
Underreporting in HBS
Estimating at intensive margin only
Estimating only on household level

20. Elasticity estimation using macro data
Methodology: Ross, H., & Al-Sadat, N. A. (2007). Demand analysis of tobacco consumption in Malaysia. Nicotine & tobacco research, 9(11),
Yt = α + β1 X1t + β2X2t + εt, where t=1, …,15
Yt- consumption per capita adult, 15+
X1t- tobacco price index
X2t- real GDP per capita
β1- price coefficient
β2- income coefficient

21. Aggregate data used

22. Error correction model
Variable
basic
tban
tlaw
tpi
rtobcpi
-0.86
-0.70
-0.80
-0.85
GDPpc
-0.01
0.01
0.04
0.02
Regulator 1 (tban)
-20.07
Regulatory 2 (tlaw)
18.38
Policy index
-3.70
Constant
232.70
214.46
245.15
226.84
Observations 15
DF test for uni root-residuals
Z(t)=-3.32
Z(t)=-3.67
Z(t)=-3.25
Z(t)=-3.42

23. Microdata: Deaton’s model
Microdata typically do not contain information on prices
Deaton’s (1988) model is a model of consumer choice, which uses the ratio between consumption and quantity information to calculate unit value of cigarettes, which is a proxy for prices
It is a three-stage model which utilizes regional and time variation in budget shares and unit values of the household to estimate the price elasticity
Model controls for household total consumption, household size and other household characteristics (gender, age, education, settlement)
We use Household Budget Survey from 2012 to 2016 estimate the model
Deaton, A., Quality, quantity, and spatial variation of price. American Economic Review 78 (3), 418–430.

24. Price and income elasticities
Model 1
Bootstrap
Model 2
Macrodata
Price elasticity
-0.76
-0.78**
-0.61
-0.62**
Income elasticity
0.33
0.34**
0.36
0.37**
Microdata
-0.46
Expenditure elasiticity
0.53

25. Conclusions & Recommendations
More research needed
Abolish gradual excise calendar
Eliminate hidden subsidies
Stop treating excises just as a source of budget income
Addopt strategic documents / better enforcement
Larger increase in excises bring economic gains
Higher budget revenues
Lower health costs
Higher labor productivity

26. Thank you for attention !
tobaccotaxation.org