CTC calls for lower cigarette taxes

Faced with falling domestic sales volumes, the Ceylon Tobacco Company is lobbying the government to bring stringent new laws to curb smuggling and revise the existing tax structure.

Cigarette manufacture has been the monopoly of the CTC for several decades, though analysts say international players like Rothmans have shown interest in setting up shop here.

It is believed that at least one international player is now making fresh attempts to enter the Sri Lankan market, with the backing of a powerful local business group.

However unlike in many developing countries, local tobacco sales have not been going up despite the increase in per capita income.

In 1997 CTC sales volumes fell 5.7 per cent. CTC says the tail end of the 1996 drought which eroded disposal income, the increased availability of smuggled international cigarette brands and the emergence of an illegal 'white' cigarette and the high price of cigarettes have contributed to the sales drop.

" In keeping with our corporate philosophy of transparency and openness, we have commenced discussions with the Treasury to review the existing excise structure," CTC Chief Executive Gottfried Thoma told shareholders.

"The outcome of these highly constructive discussions, we believe, will help in addressing the issue of consumer affordability of our products, enable market growth, discourage smuggling and prevent the manufacture of illegal white cigarettes."

In 1997 CTC turnover rose to Rs 18.6 bn up from Rs 17.8 bn with exports and a price increase contributing to the growth. Consolidated after tax profits however fell marginally to Rs 572 mn from Rs 575 mn.

The company paid Rs 16.2 bn to state coffers as excise and income tax. This is 93 per cent of total value added in the company. The company says around 300,000 persons are directly or indirectly employed in the tobacco industry.

CTC says Sri Lankan cigarettes are the highest priced in the region. As a result some analysts believe that there may be a net benefit to the government, after discounting the economic damage caused by tobacco addiction. In Sri Lanka excise duty collections from tobacco outstrip total national health care costs, but anti tobacco lobbyists point out that health care costs are only a part of the total losses caused by tobacco addiction.

They fear that any tax reduction will increase the net economic damage to the country. Indirect losses include the loss of income due to sickness, due to death, and investment in human resources lost by corporates due to premature death by tobacco consumption.

Anti tobacco lobbyists claim that last year's total revenue growth of CTC after a price increase also shows that the tobacco market is still relatively price - inelastic, displaying the ability to further absorb tax increases.

The World Bank also concludes in a strategy report that losses to economies from tobacco addiction exceed the benefits. The World Bank estimates annual net losses to the world economy from tobacco addiction to be around US $ 200 billion or nearly one percent of global GDP.

"Annual deaths from tobacco will increase significantly over the next three decades exceeding the combined deaths from AIDS, tuberculosis and complications of childbirth by 2025," the World Bank's 1997 sector strategy on Health, Nutrition and Population warned.

The strategy report says half of all tobacco related deaths which occur during peoples' productive lives with an average loss of 20 to 25 years of life. Consumption was rising fastest in low income countries, the World Bank said.

While anti tobacco lobbyists take part of the credit for the drop in Sri Lankan sales, CTC says smuggling is a serious problem causing an estimated Rs 1.5 bn loss to the government each year.

"Despite the budget proposals that were tabled in parliament in November 1996, to date no legislation, with punitive penalties, has been enacted to curb the menace of smuggling," CTC's Mr. Thoma said. "This has given a further incentive to those engaged in the smuggling trade to bring more products to the country," he said.

Accountability in banking

Once again there are accusations that the state banks have lent large sums of money to individuals and companies without adequate collateral or guarantees. This is indeed a familiar refrain, each government blaming the previous government for political interference with state banks to give loans to their supporters, kith and kin.

It was not too long ago when the situation got so bad that the government had to bail out the two state banks. The Prime Minister of the day who was also Finance Minister, described the two banks as insolvent.

A huge sum of Rs 23 bn was poured into the state banks to make them viable entities again. Of course the entirety of this amount was not owing to bad debts incurred by private individuals. There was reportedly also a sizeable amount which had been lent to public enterprises, particularly the two State Plantations Corporations which were running at a loss. These loans had treasury guarantees and the Government was committed to make this payment to the state banks. There was also bad loans due to the ineptness of bank officials.

If we are to be in a situation where each government blames the other for having interfered with the state banks and made them lend monies without adequate precautions, we will never get out of the problem of the huge bad debts in state banks. The bank officials should be made accountable for the bad debts. There are laid down and time tested procedures by which banks lend to customers. Lending large amounts above certain limits requires adequate security. If the banks have not conformed to their own rules and regulations and the Board of Directors of these banks have approved these loans they must be accountable and personally liable for these debts. It is of course likely that powerful politicians have been responsible for making the officials and the directors approve such bad loans. If there is proof of such interference then the responsibility must shift to politicians. But if there is no such evidence, as would be the case in most instances, then the bank officials and directors must take the responsibility. It is only the enforcement of this principle which could ensure that in future state bank loans are not given without conforming to bank criteria on lending.

Regrettably the information we have from bank sources is that what is condemned in the past is happening in the present. We would be told about it in the future when the government changes, but then it is too late. What is more important than digging too far into the past is to see that the problem that has been often repeated is not being repeated again.

The best institution to delve into the current situation would be the Central Bank. After all it is the responsibility of the Central Bank through its bank supervision arm to look into this, examine and report whether the banks have been complying with normal banking standards and criteria. In case the Central Bank finds that there is no such problem currently then the public would be relieved. If we are told later that there was a problem, the Central Bank must take the responsibility. The tragedy in our national economic affairs is that there are no systems of accountability which are rigidly enforced without fear or favour.

There are many facets to the East Asian crisis. But one important facet was its banking weakness, which has been neatly summed up by Paul Krugman, Professor of Economics at MIT in the March 2nd issue of Fortune. He says:

"lt began we now think with bad banking. In all of the countries that are currently in crisis, there was a fuzzy line at best, between what was public and what was private; the Minister's nephew or the President's son could open a bank and raise money both from the domestic populace and from foreign lenders, with everyone believing that their money was safe because official connections stood behind the institutions.

"Government guarantees of bank deposits are standard practice throughout the world. But normally these guarantees come with strings attached. The owners of banks have to meet capital requirements, restricting themselves to prudent investments and so on. In Asian countries however too many people seem to have been granted privileges without responsibility."

Our situation certainly is not as bad as in some of those Asian countries. But there are some elements of it. We may well ask whether what is happening in Sri Lanka is a variant of this banking debacle. It is high time that a special effort is mounted to stop the rot of poor lending by state banks. Blaming previous regimes wont help, if the state banks continue to be politicised and are conferring privileges on a chosen few at the expense of the general public.

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