A study of the causes of the real netof-tax cigarette price increases in
South Africa (1990-2012)
Diana Nyabongo

Background
• It is well known that South Africa has used excise tax policy as a tobacco control tool since the early
1990s
• The increases in excise tax resulted in increases in price, reduced consumption and smoking prevalence, and increased tax revenues
• The key economic relationship is the price elasticity of demand
• However, of interest to policy makers is how their tool (excise) influences prices

What are the industry options?
• First, what is the net-of-tax price?
Net-of-tax price + Excise + VAT = Retail price
• The industry may respond to an increase in excise tax by:
– Increasing the net-of-tax price
– Not changing the net-of-tax price
– Decreasing the net-of-tax price

How concentrated is the market?
Company
British American Tobacco
Japan Tobacco
Philip Morris International
Other
Share
89.5%
4.2%
1.7%
4.6%

25,00
20,00
15,00
10,00
5,00
0,00
Decomposition of cigarette prices in South Africa
Real NOT price R/20 cig. 2012 prices Excise rate R/20 cig. 2012 prices VAT/GST R/20 cig 2012 prices

The endogeneity problem
• While South Africa’s excise tax is, in principle, a uniform specific tax, it is implemented as a hybrid excise tax
• The National Treasury set the specific tax so that the total tax burden (excise plus VAT) equals 52% of the retail price

International trade liberalization
• Post apartheid, South Africa embarked on a fairly aggressive trade liberalization policy
• This led to the lowering of import tariffs
• Let us inspect some tariff lines

SADC
EFTA
EU
RoW
Import tariffs on raw tobacco
1995
37.09%
37.09%
37.09%
37.09%
2000
17.37%
17.37%
17.37%
17.37%
2005
0%
-
13.92%
15.82%
2010
0%
15%
3.75%
15%

SADC
EFTA
EU
RoW
Import tariffs on manufactured cigarettes
1995
30.59%
30.59%
30.59%
30.59%
2000
30.07%
30.07%
30.07%
30.07%
2005
0%
22.55%
26.45%
30.06%
2010
0%
40.85%
11.21%
45%

SADC
EFTA
EU
RoW
Value of imports of raw tobacco
1995
$ 37.3
$ 1.3
$ 0.2
$ 12.2
2000
$ 26.2
$ 0.3
$ 1.4
$ 14.2
2005
$ 23.0
$ 0.1
$ 12.2
$ 42.3
2010
$ 39.0
$ 0.0
$ 88
$ 122.9

SADC
EFTA
EU
RoW
Value of imports of manufactured cigarettes
1995
$ 0.0
$ 0.4
$ 1.0
$ 10.0
2000
$ 0.1
$ 0.4
$ 1.6
$ 2.5
2005
$ 2.3
$ 1.5
$ 8.3
$ 2.0
2010
$ 7.1
$ 3.5
$ 9.1
$ 10.2

A model
• Time series
• Autoregressive Distributed Lag Model (ARDL,
1 1 1)
• Price is a function of:
– Raw tobacco prices
– Private consumption
– Tariff
– Excise

Results
• Lagged prices (-), raw tobacco prices (+), private consumption (+) and excise tax rate (+) are statistically significant
• In the difference term only excise rate (+) is statistically significant
• Tariff is not statistically significant!

Variable
Raw tobacco
Private consumption
Tariff
Excise rate
Unexplained
Results
Coefficient
0.1705
0.4381
0.2939
0.5840
Share of variation of dependent variable
8.6%
11.5%
1.3%
71.5%
7.1%

Some concluding thoughts
• It is clear that excise taxes are the predominant driver of retail prices in South Africa
• The industry have clearly over-shifted excise tax increases
• This has occurred even in the face of an endogenous tax policy
• A key point is how trade policy, while not changing the market for manufactured cigarettes significantly, has altered the source of tobacco leaf imports