Marlboro or Malimbu? Smuggling burns Egypt cigarette makers

In effort to staunch influx of smuggled cigarettes and raise govt tax revenue, Egypt's three cigarette producers will henceforth be obliged to stamp all their products with special watermark

Government efforts to combat the smuggling of cigarettes into Egypt by obliging local cigarette manufacturers to stamp all their products will do little to solve the problem, tobaccocompany officials say.
Local cigarette and alcohol producers will be expected to adhere to a new sales-tax system by July 2012 in hopes of limiting smuggling and generating an additional LE3 billion in annual state revenue, the finance ministry announced on Thursday.
The new system will oblige companies to stamp their tobacco and alcohol products – whether locally manufactured or imported – with a watermark, which, say officials, will staunch tax losses.
The local cigarette market, in particular, has been flooded with smuggled goods since the outset of Egypt's Tahrir Square uprising early last year. One source at British American Tobacco-Egypt (BAT-Egypt) estimated that smuggled cigarettes accounted for as much as 20 per cent of the local market.
Along with losses incurred by tobacco companies due to the erosion of market share, government revenues have also been impacted as smuggled cigarettes are not subject to taxes or customs duties.
In an effort to combat the phenomenon, the new tax system will seek to both track smuggled goods and differentiate them from their legitimate counterparts. Some critics, however, express doubts as to the new system's efficacy.
"I don't believe it will be effective," BAT-Egypt Head of Corporate and Regulatory Affairs Karim Refaat told Ahram Online. "You don't need a stamp to tell legal from smuggled products."
Smuggled cigarettes, for example, do not carry the same health warnings or ingredients labels, and often bear names and logos similar to those of better-known brands – such as "Roseman" instead of "Rothmans."
Over 15 smuggled brands of cigarette are currently available in the Egyptian market.
Since they are not taxed, they are usually sold at prices significantly lower than legal brands. A pack of Marlboro reds, for example, can cost as much as LE15, while a pack of similar-looking "Malimbu" cigarettes retails for around LE4 or less.
The government says the new stamp will include a watermark that will be "impossible" to forge. Refaat, however, believes such talk is unrealistic. "Any paper stamp can be counterfeited," he said.
Three companies are currently licensed to make and sell cigarettes in Egypt, led by the state-owned Eastern Company, whose cheaper “Cleopatra” brand cigarettes have long dominated the market. Two foreign companies also operate in the local market: BAT-Egypt and Phillip Morris International, both of which use Eastern Company factories to manufacture their products.
All three companies recently complained to the finance ministry about the anticipated difficulties associated with stamping their packs of cigarettes. The Eastern Company, for its part, said in January that it would require some 40 million euros to make the necessary adjustments.
"We told them we would need 30 months to adjust the machines and order new ones," Refaat said.
Nevertheless, the head of Egypt's Tax Authority recently stated that an agreement had been reached between the authorities and the Eastern Company for the latter to adjust its production by July.
Other industry officials, however, believe the ministry's approach to the problem is an outmoded one.
"The new scheme will not solve anything. If it wants to stop smuggling, the government should simply close Egypt's open borders to the east and west," Mohamed Osman, head of marketing at the Eastern Company, said.
"We've lost close to 35 per cent of our sales, and now the government wants to make us spend more money," he added.
The new anti-smuggling scheme will cost companies LE0.05 per stamp, generating some LE3 billion per year in state revenue, according to Refaat.
"The new stamps will not deal a significant blow to our profitability, and we will have no choice but to comply with the scheme," Refaat said. "But our main problem – namely, smuggling – will remain unresolved."