Supply and Demand
of tobacco products in SEE

Executive summary

Consumption of tobacco products imposes a significant economic and health burden on a society. Research evidence collected around the world shows that effective tobacco taxation systems can reduce the negative effects of tobacco consumption, decrease prevalence rates, and increase government revenues. The evidence from low- and middle-income countries confirms these same outcomes.

A recent projectin Southeast Europe (SEE) confirmed the same findings. That research was undertaken in seven middle-income SEE countries with a total population of 22 million inhabitants: Albania, Bosnia and Herzegovina (B&H), Croatia, Macedonia, Montenegro, Serbia, and Kosovo. It was conducted in 2018 following the same research methodology, thereby providing a unique source of comparable data for seven SEE countries related to the tobacco products’ market, taxation system, tax structure, as well as pricing and its impact on demand and income elasticity of tobacco products.

The research confirmed a negative price elasticity of demand for cigarettes in all the countries. Price and income elasticity were estimated by two different econometric methods: a time-series analysis and an analysis of the household expenditure survey (HES) data. The results are in line with the estimated elasticities in other low- and middle-income countries, ranging from -0.44 to -0.83, based on the timeseries data, and from -0.29 to -1.07 based on the HES data. The estimated income elasticity ranges from 0.24 to 0.91. These results show that a 10% increase in tobacco prices would reduce consumption by between 2.9 and 10.1%. Thus, even higher tobacco prices through increased tobacco excises can have a significant impact on reducing tobacco products consumption. Moreover, tax and price increases should be significant enough to reduce the affordability of tobacco products to limit the impact of increasing income.

Descriptive data show that, with respect to the tobacco market, tobacco manufacturers are strongly influential only in Serbia. In Kosovo and Albania the manufacturers have no significant presence, while importers and the wholesalers heavily impact the market. Tobacco farming in the region has a negative trend, especially in Macedonia which is the largest tobacco producer in the region. Major international companies are increasing their market share as privatization of former state-owned manufacturing companies has finalized.

Tobacco taxes have been levied in all seven countries as a control tool to increase the retail price of tobacco products and to reduce tobacco product consumption. Five of the countries apply a mixed excise system for cigarettes while Albania and Kosovo levy only a specific excise. In 2017, the ad valorem excise tax rate ranged from 9% in Macedonia to 42% in B&H, while the specific excise ranged from €29.5 in Serbia to €46.4 in Albania per 1000 cigarettes. The VAT is levied on tobacco products in all seven countries. The weighted average retail price of cigarettes in 2017 ranged from €1.34 in Macedonia to €3.22 in Croatia. Tobacco tax revenues have been continuously nominally increasing in all seven countries. Except in Croatia, the prevalence has been decreasing over time according to WHO data in the whole region. However, the tobacco excise tax revenues have a continuous increasing trend in all countries.