Can Turkey disprove IMF’s dismal economic growth forecast?(al-Monitor, April 29,2017)
Summary: The International Monetary Fund expects the Turkish economy to further slow down in 2017,…
The tobacco market remains an important source of profit for manufacturers, tax revenues for governments and livelihood for farmers, despite the global rise of efforts to combat smoking and a relative decline in global tobacco use in the past two decades. Amid the downward trend, both tobacco cultivation and cigarette production have increasingly come under the control of a small number of multinational companies.
In Turkey, historically a major tobacco producer, the global changes have led to a cigarette industry fully controlled by foreign companies, a steep increase in the use of imported tobacco for cigarette production and an equally sharp decline in domestic tobacco cultivation. Today, locally produced tobacco accounts for only 11% of the tobacco used by the manufacturers that have come to rule the country’s cigarette industry as a result of privatization.
Five multinational giants — British American Tobacco, Philip Morris International, Imperial Brands, Japan Tobacco and Altria Group — dominate the global tobacco market today, holding sway over all links of the chain, from cultivation to cigarette production and sales. As such, they influence decisions on what types and amounts of tobacco are grown, where they are grown and what varieties are blended for cigarette making, thus steering the course of tobacco farming and cigarette industries in various countries.
Along with the Virginia and Burley varieties, Oriental tobacco — known also as Turkish tobacco — is a basic variety that constituted a major link in the Ottomans’ participation in the world economy. It was also among the basic products that became subject to foreign monopoly as part of a European-controlled regime created in 1881 to collect debt from the cash-strapped empire.
After the birth of modern Turkey in 1923, the cultivation of tobacco expanded, both for export and for use in the local cigarette industry, and governments propped up tobacco farmers through support buying. In the late 1990s and early 2000s, financial crises forced Ankara to reduce public welfare spending as part of recovery programs sponsored by the International Monetary Fund and the World Bank. As a result, Ankara stopped subsidizing tobacco cultivation, causing a decline in production, and eventually privatized the state-owned tobacco firm TEKEL, thus handing over cigarette production to foreign manufacturers.
Since then, several foreign companies have come to dominate the Turkish tobacco market, namely British American Tobacco, which bought the TEKEL cigarette company in 2008, Philip Morris Sabanci, Japan Tobacco International, European Tobacco and Imperial Tobacco. South Korea’s KT&G has made inroads as well, establishing a plant in the western city of Izmir.
Unlike the traditional local industry, which used mainly Turkish tobacco to make cigarettes, the foreign companies have used mostly the Virginia variety, radically transforming tobacco farming and the cigarette industry in the country.
According to a report by Turkey’s Tobacco Experts Association, the country’s Turkish tobacco exports were worth $279 million last year, equivalent to only half of the $562 million Virginia and Burley tobacco imports. The figures illustrate a sharp reversal, in which the domestic produce has steadily lost ground against imported tobacco. In 2006, for instance, exports were worth $497 million and imports $258 million.
Similarly, the report indicates that only 11% of the tobacco used by cigarette makers in Turkey last year was produced locally, down from 35% in 2006 and 42% in 2003.
The country’s overall exports of tobacco and tobacco products were worth $922 million in 2020, while imports reached more than $1.2 billion, creating a foreign trade deficit of some $300 million stemming from this sector alone.
Nevertheless, the tobacco sector remains one of the government’s principal sources of tax revenues in a country where 28% of the population aged 15 and above are daily smokers, according to official figures. About 81% of the price of a cigarette pack in Turkey goes to the treasury in the form of various taxes that officials say are designed to deter young generations from starting smoking and encourage existing smokers to quit. Last year, the special consumption tax — the largest levy on tobacco — raked in 61 billion Turkish liras ($8.7 billion in terms of the average exchange rate in 2020) for the treasury, compared to 16 billion liras ($2.3 billion) from alcohol sales. All in all, Turkish smokers spent some 90 billion liras ($13 billion) on cigarettes last year.
The rise in taxes and prices, however, has fueled cigarette smuggling and led many smokers to turn to cut rag tobacco, rolling their own cigarettes or buying cigarettes hand-rolled by small vendors. It is believed to be the main reason the formal sale figure decreased by 2 billion cigarettes last year from 2019. Turkish smokers are estimated to have smoked 20 billion hand-rolled and smuggled cigarettes, in addition to 118 billion factory-produced cigarettes sold formally on the market. Amid Turkey’s economic turmoil, illicit sales are likely to increase and the government has already enacted a number of measures.
Many tobacco growers, meanwhile, have been leaving the agricultural sector amid the shrinking demand for domestic tobacco and lack of support to help them shift to other varieties that require irrigation, unlike Turkish tobacco, which is grown with dryland farming. Under the current conditions, few local producers could compete with the influx of imported tobacco, mostly from Brazil, Germany, the Netherlands and Mozambique. The government has set certain targets to increase the share of domestic tobacco in the cigarette industry, but such efforts are unlikely to succeed unless the production of varieties sought by the companies increases. And thus far, Ankara has failed to make any visible effort to support farmers in this direction.