SINGAPORE -- With Asia facing potentially debilitating health care costs related to high rates of smoking, many countries have been trying to curb tobacco consumption by increasing taxes. But this seems to have backfired by triggering an upswing in smuggling that has undermined tax revenues without doing much to protect the public.
One of the most prominent cases is Malaysia, where the government has been raising taxes on cigarettes for several years. At the end of 2015, the levy was bumped up by 40%, now accounting for over half the price of a pack of 20 major-brand cigarettes, which costs around 12 ringgit to 17 ringgit ($2.84 to $4.02).
The higher prices have led to the proliferation of illegal imports. A range of international and local brands are being brought into the country under the radar, primarily from Indonesia.
In Malaysia, cheap smuggled cigarettes are available for just 3 ringgit to 5 ringgit at mom-and-pop stores almost anywhere, especially in smaller cities and rural areas.
While contraband tobacco is nothing new in Malaysia, the price increases on legal products in recent years have turned the trickle into a flood. It is estimated that nearly 60% of all cigarettes sold in the country are now illicit.
Other Asian countries have played the same cat-and-mouse game. After Pakistan raised tobacco levies by 15.4% in 2014 and another 23.3% in 2015, it was immediately followed by a spike in smuggled cigarettes: 6.1 billion illicit cigarettes were consumed in 2015, up from 3.5 billion a year earlier, according to the Asia Illicit Tobacco Indicator 2015 report, compiled by the International Tax and Investment Center and Oxford Economics. That marks a 75.4% rise.
In the Philippines that same year, consumption of smuggled cigarettes jumped 68.1% to 1.5 billion cigarettes, following three consecutive years of tobacco tax increases.
The total government tax loss in the Association of Southeast Asian Nations was around $2.1 billion in 2015, according to the report. Indonesia, Malaysia,the Philippines and Vietnam accounted for more than 90% of the lost revenues.
The deluge is taking its toll on the profits of major tobacco makers operating in Malaysia. British American Tobacco Malaysia, which holds over half of the legal market share, saw sales fall by 35% in the July-September quarter from two years earlier.
In its earnings report for the period, the company said illegal cigarettes had sabotaged a sales recovery that had begun in the first half of this year. BAT Malaysia's stock price has fallen by nearly 40% in the past two years, to below 40 ringgit.
Philip Morris International and Japan Tobacco are also hurting. JT plans to shut down its only manufacturing plant in Malaysia in December.
"The significant and alarming development of illegal tobacco products has led to a 25% decline in the size of the overall legitimate market," said a JT representative in Malaysia.
"The operational limitations significantly hinder the sustainability of our current manufacturing operations in Malaysia and further development of our business in the country." The company sells brands such as Winston and Mevius.
Southeast Asia has some of the highest smoking rates in the world. Some 76% of Indonesian men over 15 smoke according to the World Health Organization, the highest in the world. Vietnam's 47%, Malaysia and the Philippines' 43% and Thailand's 41% were high on the list.
Tobacco use kills more than 7 million people every year and costs households and governments over $1.4 trillion through health care expenditure and lost productivity, the WHO estimates.
Ideally, raising levies would curb tobacco use, prevent million of people falling ill and bring down health care costs.
But illicit tobacco creates a vicious cycle. Not only do smoking rates stay as they are, the trade also deprives governments of much needed revenue to treat the ill.
Nikkei Asian Review Chief Desk Editor Ken Moriyasu contributed to this report.