On October 29, 2023, Egypt’s House of Representatives approved a long-awaited tax increase on tobacco products. The 2016 amendments to the Value Added Tax Law will increase the minimum and maximum limits of each section by 12% every year for five years and expand the price range of taxed cigarettes. In addition, the draft law will increase the fixed tax on three components of the cigarette price by 0.50 Egyptian pounds ($0.02), resulting in an increase of 4.5 Egyptian pounds for cigarettes with a retail price below 31 Egyptian pounds, and an increase of 4.5 Egyptian pounds for mid-price cigarettes (selling between 31 and 45 Egyptian pounds). (between pounds sterling) will increase by EGP 7, and cigarettes priced above EGP 45 will increase by EGP 7.5.
The bill also increases taxes on tobacco products by 75%, raising the minimum tax rate from the current 30 Egyptian pounds per kilogram to 60 Egyptian pounds per kilogram. Taxes on imported and local molasses products will increase by 25%, while taxes on heated tobacco products will increase from 1,400 Egyptian pounds per kilogram to 1,800 Egyptian pounds per kilogram. Under the new law, e-cigarette oil will be taxed at 4 Egyptian pounds per milliliter instead of the current 2 Egyptian pounds per milliliter.
The amendment will allow cigarette manufacturers, which face rising production costs and the depreciation of the Egyptian pound, to adjust prices without increasing tax rates. The tax increase is expected to generate additional revenue of up to 8 billion Egyptian pounds per year for the state budget.
According to the chairman of the House Planning and Budget Committee, the move is also to encourage tobacco companies to increase production to curb the rise in cigarette prices and thereby end the country's cigarette crisis. The Egyptian cigarette market has been in turmoil since May. According to observers, the issue arose after the finance minister called for revisions to the 2023-2024 budget to increase taxes from 81 billion Egyptian pounds to 87 billion Egyptian pounds. However, the government has been slow to implement tax increases. This was followed by a shortage of tobacco products, especially cigarettes, and the rise of an informal parallel market in which a pack of the country's most popular brand, Cleopatra, was sold for 50 Egyptian pounds. The price is sold instead of 24 Egyptian pounds.
As soon as tobacco merchants heard about the tax increase, they seized the opportunity to stock up on cigarettes and earn extra profits. Artificial scarcity causes cigarette prices to skyrocket, forcing smokers to buy unknown, adulterated or smuggled cigarettes, which in turn reduces tax revenue. Cigarette prices fell to 40 Egyptian pounds in September after Egypt's tobacco monopoly Eastern Company increased production by 40 percent and stepped up vigilance against illegal sales.
foreign exchange crisis
Pieter Vorster, managing director at Idwala Research, said: “Apart from traders taking advantage of the situation, this is clearly an unfavorable environment, although this is due to the tax increase being notified well in advance of its implementation. "This is exacerbated by weak enforcement and currency shortages." "Tax increases help reduce profit margins in the parallel market, but if there is a perception that currency shortages may lead to production disruptions, then inventory may continue."
Egypt was hit hard by Russia's invasion of Ukraine in February 2022, causing many foreign investors to abandon emerging markets. As a result, the country has been battling rising global wheat and energy prices. According to a U.S. State Department report, Egypt's foreign debt reached $164.7 billion in June 2023.
In December 2022, the International Monetary Fund (IMF) approved a 46-month US$3 billion loan to Egypt to overcome its economic crisis, provided that the Egyptian government carries out several structural reforms. It insists that Egypt adopt a flexible exchange rate, lift import restrictions and privatize state-owned enterprises.
Despite government efforts to create a more conducive business environment, foreign investors still face challenges such as bureaucracy, lack of transparency, uneven enforcement, corruption, intellectual property issues and skilled labor shortages.
Egypt sold a major stake in Eastern Co. on September 3, 2023, as part of its commitment to sell stakes in 35 state-owned enterprises. The United Arab Emirates' Global Investment Holding (GIH) paid 19.3 billion Egyptian pounds to acquire 30% of the 50.9% stake it previously held in state-owned Chemical Industries Holding Co., which Worst believes Price is too high. "This appears to be a high multiple for a non-controlling stake without the synergies that a tobacco company might gain," he said. According to Daily News Egypt, Japan Tobacco International Tobacco International and United Tobacco Co. also submitted offers to acquire Eastern Co. shares. Philip Morris International holds a majority stake in the company.
After the transaction is completed, 20.9% of Oriental Petroleum's shares will still be owned by Chemical Industries Holding Company, 35% of the shares will be freely traded on the Egyptian Stock Exchange, and the remaining 15% will be held by various private shareholders. GIH announced that it will invest US$150 million to restore the supply of raw materials to Oriental. However, it remains unclear whether it will be allowed to use its funds to import tobacco. Egypt bans tobacco cultivation and imposes a 75% tax on imported tobacco leaves. The Emirati company will work with banks to help Eastern companies obtain foreign currency for imports, Egyptian media outlet Mada reported. "In the short term, (the deal) is clearly a positive," Vorster said, "but the potential for more adverse excise tax and regulatory regimes could significantly weaken that."
growing market
The deal could still be a win-win for both parties. Egypt is in dire need of dollars to pay for imported goods. Oriental Tobacco accounts for 70% of tobacco sales in Egypt, one of the world's few remaining growing cigarette markets. Statista expects the market to generate $6.3 billion in revenue by 2023 and grow at an annual rate of 9.65% by 2028. According to Alternative Policy Solutions, a public policy research project at the American University in Cairo, approximately 18 million Egyptians over the age of 15 smoke. In 2022, total cigarette consumption increased by 7%. Smoking is a male habit: The World Health Organization predicts that 63% of the country's male population will be smokers by 2025, up from 41.8% currently. Only 0.3% of women currently smoke.
According to Forbes Middle East, Oriental has a market capitalization of US$1.2 billion. The company reported net profit of EGP 5.29 billion in the first nine months of the 2022-2023 fiscal year, 24% higher than the same period last year. Its revenue increased to EGP 14.6 billion from July 2022 to March 2023, compared with EGP 12.78 billion in the same period of the previous fiscal year. The company supplies 88 billion cigarettes to the Egyptian market between 2022 and 2023.
According to Mada, with the acquisition of Oriental's stake, GIH will effectively control more than 40% of the Egyptian tobacco market, as the investment firm's founder also holds shares in United Technologies. How their acquisitions will impact the overall market remains to be seen. Wurst pointed to Turkey as an example, pointing to several examples where the excise tax and regulatory environment became significantly less favorable when countries exited former monopolies. "There also seems to be an argument that with PMI now manufacturing its own products and other companies potentially following suit in the future, competition in the market may intensify significantly," he said.
Philip Morris International launches local production
In the domestic market, the only competitors of Eastern Company are JTI and UTC. British American Tobacco withdrew from the Egyptian market last year, citing a lack of economic viability. Philip Morris' withdrawal came shortly after it struck a licensing deal with Eastern Co. in April 2022 to produce cigarettes in Egypt. More than a year ago, Egypt's Industrial Development Authority invited several companies to bid to become the country's second tobacco company. However, the agency was forced to reopen the tender after bidders complained that its conditions gave Eastern an unfair advantage. United Technologies was the only company to bid in the retender. According to the agreement, Eastern Corporation obtained 24% of United Technologies' shares.
Although this was the first step in privatizing the tobacco monopoly, the agreement stipulated that United Technologies would only produce PMI-owned products, thereby protecting Oriental's market share and preventing newcomers from producing cigarettes priced at the same price as Oriental's best-selling product, Cleopatra.
In September 2022, United Technologies began producing cigarettes at the production base of its predecessor, Philip Morris Misr, which licensed Philip Morris International's products in Egypt in 2013. Philip Morris International's flagship brand Marlboro has been produced by Eastern Co. since 1985. Under the agreement, PMI products will be sold in Egypt under the label "Made by United Technologies".
United Technologies also received a license to produce e-cigarettes. In April 2022, Egypt legalized the import and commercialization of e-cigarette products. Statista estimates that the country’s e-cigarette market will reach $400 million in revenue by 2023.
The recent sale of a stake in Eastern Co. could also pave the way for more ambitious efforts to reduce tobacco harm in Egypt. To date, Eastern Co.'s portfolio has only offered high-risk products such as cigarettes, hookahs and cigars. Vorster is less optimistic. "Theoretically, this is slightly beneficial, but with cigarettes priced below $2 a pack, it's difficult to see low-risk products gaining significant traction," he said.
