1. 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

2. 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

3. Tobacco cultivation in Republic of Macedonia
The charts shows the annual tobacco leaf production, in tones, for
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

4. 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

5. 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 deaths could be averted
( TFYRofMacedonia.pdf?fbclid=IwAR3V8UnJZ9Pb7pfhUZv4ron06Hs8oyFQHC6_8FXwkKogpl2bZFVO2aKz EKg)

6. 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; content/uploads/2016/12/ESPAD-izvestaj-final-final.compressed.pdf
Smoking prevalence realizes a moderately declining trend during the period
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%

7. Consumption of cigarettes
The chart shows the annual consumption of cigarettes per capita for the period
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 cigarettes
Source: Ministry of Finance

8. 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

9. 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 under the Excise Law
The overall excise burden in 2017 amounts to 39.4 EUR per 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

10. 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

11. 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

12. 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

13. 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

14. 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

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

16. 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)

17. 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

18. 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

19. 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

20. 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

21. 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%.

22. 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

23. 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

24. Thank you for your attention