Economic Slowdown Snuffs Out Growth in Indonesia's Smoking Industry

A vendor sells cold drinks and cigarettes near Monas, the National Monument, in Jakarta on July 21, 2015. (Reuters Photo/Darren Whiteside)

By : Bernadette Christina & Randy Fabi | on 9:23 AM July 23, 2015
Category : News, Business, Commodities, Health, Featured

Jakarta. Indonesians are smoking less than before, and that poses a dilemma for a government that faces a budget shortfall as well as rising unemployment and counts on tobacco taxes for about 10 percent of state revenue.

President Joko Widodo's government needs to decide whether to significantly raise tobacco taxes in 2016, something Indonesian authorities have done for years.

The industry association representing Indonesia's huge cigarette industry – the world's fifth largest – says a big hike will bring further declines in sales and heavy job losses. It says small factories already laid off 10,000 workers last year.

The issue has arisen amid Indonesia's worst economic slowdown since 2009. That has hit consumption of everything from cars to noodles, and forced President Joko to backtrack on his get-tough tax campaign and instead embrace policies to promote consumer spending.

In recent weeks, the government has removed luxury taxes from most goods, raised the minimum taxable income threshold for individuals, and promised no new types of tax this year.

Tobacco taxes have been raised an average 11 percent annually since 2010. Joko set ambitious tax collection targets for this year, including one of Rp 139 trillion ($10.42 billion) for cigarette taxes, and if that's not met, the government's budget gap will widen.

At this stage, the government is undecided on what to do with the cigarette tax for 2016.

In Indonesia, where about 60 percent of men smoke, cigarette production increased at an annual 7 percent average between 2007 and 2013. Last year, it declined 0.5 percent and this year will see a 2 percent fall, according to the Association of Indonesian Cigarette Producers.

“If [production] is declining and we are not careful on imposing the tax, production will decline further,” Heru Pambudi, the Finance Ministry's director general of customs and excise, told Reuters.

The ministry earlier this year announced plans for an additional 10 percent value-added tax on cigarette sales, but has yet to impose it and may scrap that proposal.

A leading economic indicator

The producers' association maintains that higher taxation in 2016 will make conditions much harder for factories. “The industry must be protected,” spokesman Hasan Aoni Aziz said. “Smoking is often the indicator of the economy.”

A statistics bureau survey of low-income households found the only item they spent more on than cigarettes was rice, the staple food.

Last year, Indonesia made 344 billion sticks, of which more than 90 percent were distinctive kretek cigarettes, containing cloves to spice up the taste. The big listed makers are Hanjaya Mandala Sampoerna, Gudang Garam and Wismilak Inti Makmur.

The number of cigarette factories has dropped to 600 from more than 3,000 five years earlier.

Heru of the Finance Ministry said declining consumption “may have been caused by a variety of factors like consumers' awareness of the dangers of smoking, cigarette price hikes and declining purchasing power.”

Reuters

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