The document analyzes the impact of cigarette excise rate increases in Rwanda from 2008 to 2016. It finds that increasing excise taxes led to a 17.4% reduction in cigarette consumption, meeting the health ministry's target. Price elasticity of demand for cigarettes was estimated to be between -0.474 to -0.532, indicating that a 1% price increase reduces consumption by 0.474 to 0.532%. Imported cigarettes had a more negative price elasticity than domestic cigarettes. The study recommends continuing excise tax increases to further reduce smoking, while also tightening anti-smuggling measures to prevent tax revenue losses.

1. The Impact of cigarette excise
rate increases on tobacco
consumption and tax revenue in
Rwanda(2008Q2-2016Q3).
HAKIZIMANA Naphtal
October 2017
1

2. Content
2
Background of the study1
Taxation regime2
Methodology used to measure the impact3
Findings4
Policy implications5
How excise tax affects cigarette
consumption?
b
Tobacco taxation regime in Rwandaa

3. Justification for Excise Duty on
Tobacco in Rwanda
3
5.2 5.3
7.6
5.1%
4.7%
5.6%
4.0%
4.5%
5.0%
5.5%
6.0%
0
2
4
6
8
2013/14 2014/15 2015/16
%ShareinTotalExcise
collections
TobaccoExciseTax(Billion
FRW)
Tobacco Excise tax collections
Tobacco Excise Tax(BnFRW) Share in Total Excise
 Is justified in terms of the negative health impacts of smoking.
 In addition to discouraging smoking, Excise Duty on tobacco helps
generate government tax revenue.
Tobacco Excise
Tax grew
continuously
Share in Total
Excise Tax
Fallen in
2014/15

4. Rwanda introduced new policy in order to maximize
revenue collection and reduce cigarette consumption
4
Tobacco Taxation regime in Rwanda (For imports and local cigarettes)
60% in
2001
150% since
2009-June
2015
36% of the retail price +
specific excise of
FRW20/pack of 20 since July
2015
Purely ad-valorem
Move
to
Mix of both ad-valorem
and specific excise
What was the effects of the new policy?
In terms of revenue generation, the
policy effect was a mere of
FRW1.4Bn, which is far less than
FRW5.0Bn that was anticipated
The new policy raised the price
and reduced the cigarettes
consumption by -17.4% which
was in line with the
MINISANTE target
By implementing this new policy, does the
Ministry of Finance take into account the
behavioral implications of increasing the
cigarette price which in turn had an impact on
expected tax revenue?
Question
120%
in 2007

5. What other people have said on the use of
high taxes to reduce smoking?
5
From Public
Health Perspective
By
Preventing non-
smokers from starting
Preventing former
users from re-starting
Leading current users
to try to quit
How this concept of taxation policy is understood?
Is through the concept of price elasticity of demand for
measuring the responsiveness of cigarette consumption
to changes in the adjusted price of cigarette
Some
studies
found that
Barzel found that
overall price elasticity
of demand ranges
from -0.5 to -0.25 in
high income countries
10% in cigarette
price will cigarette
consumption by
between 5 and
2.5%
Others found that
youth and young
adults are more
responsive than
adults
Suggested that high taxes
leading to high price
would be a very effective
means to permanent
reductions in smoking for
all age groups

6. Methodology used to perform the analysis
6
Study used time
series data(2008Q2-
2016Q3)
To estimate cigarette demand
function parameters and price
elasticity of demand
To calculate the tax elasticity of price
(extent to which tax increases reflect
in price increases)
What are important variables?
Cigarette
tax:Ctax
Cigarette
Produced:Cp
Cigarette
Consumed:Cc
Tobacco
Exc.Rate:TER
Per Capita
Income:Y
C. Selling
Price:Pc
Dummy
:D
4 models
were
used
Log Linear demand f(x) with real price and real income as Ind.Vari.: 𝑙𝑛𝐶𝑡=µ0 + µ1 𝑙𝑛𝑃𝑐𝑡 + µ2 𝑙𝑛𝑌𝑡 + 𝜀𝑡1
Includes a dummy representing the period after new policy:𝑙𝑛𝐶𝑡=µ0 + µ1 𝑙𝑛𝑃𝑐𝑡 + µ2 𝑙𝑛𝑌𝑡 + µ3 𝐷 + 𝜀𝑡
Time trend to represent all other factors that influence the demand: 𝑙𝑛𝐶𝑡=µ0 + µ1 𝑙𝑛𝑃𝑐𝑡 + µ2 𝑙𝑛𝑌𝑡 + 𝑇𝑟𝑒𝑛𝑑 + 𝜀𝑡
Lagged dependend variable to capture the addiction of cigarettes: 𝑙𝑛𝐶𝑡=µ0 + µ1 𝑙𝑛𝑃𝑐𝑡 + µ2 𝑙𝑛𝑌𝑡 + µ3 𝑙𝑛𝐶𝑡−1
2
3
4

7. Methodology used to perform the analysis
7
Similtaneity
problem has
been tested
through
Hausman test
between Cc
and Pc
Estimated Pc(Y,TER)
Gave predicted residual by subtracting Pc from its
estimated value
Added predicted residual as independent variable to
get 2nd regression
The significance of predicted residuals parameters
implies simultaneity
Used Excise tax as an instrumental variable

8. The new policy led to reduction in cigarettes consumed,
this reduction was mainly driven by imported cigarettes
Since 2010/11, total sale
of cigarettes in Rwanda
is driven by imports and
it represents 68.4% in
2015/16
Led to considerable reduction
of -17.4%. But total sale of
cigarettes is raising at
decreasing rate in other years
This is
explained by
a decrease of
-23% in
imports since
the yearly
contribution
is>60%
The new policy of
July 2015 has
approximately
doubled the
cigarettes price
This reduction met the MINISANTE target

9. 9
Despite the decrease in 2015/16, cigarettes consumed is directly
proportional with income per capita and prices.
0
5
10
15
20
25
30
0
100
200
300
400
500
600
700
800
2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
Cigaretteprice
RealIncome&Cigarettes
Cigarettes Consumed (in 'MillionsRwf) Income per Capita (in '000 Rwf) Prices
Cigarette price
appears stable
with slight
increases until
2014/15
Income
per capita
had been
increasing
Implying an increase in cigarette consumption until 2014/15
Even though per capita income increased, consumption reduced after the new policy
This is because the increase in prices was larger than the increase in income
Continual annual growth in aggregate consumption
After the new policy, price increased and aggregate
consumption decreased

10. Impact of new policy on total cigarettes in
terms of elasticities
10
(1) (2) (3) (4)
ln_quantity ln_quantity ln_quantity ln_quantity
ln_price -0.532***
0.452 -0.474**
-0.515**
(-3.12) (0.31) (-2.33) (-2.72)
ln_income 0.450***
0.250***
2.755 0.387***
(5.94) (4.02) (1.59) (3.55)
dummy -1.408
(-0.68)
trend -0.0303
(-0.54)
L.ln_quantity 0.0101
(0.05)
_cons -5.649*** -6.367*** -11.05 -5.201**
(-3.23) (-3.11) (-1.09) (-2.30)
N 34 34 34 33
We opt
Model 1
to explain
the
demand of
Cigarette
in Rwanda
Price elasticity is between -0.474 and -0.532 and is in line with other studies in
developing countries
Implies that when price increases by 1%, demand for cigarettes drops by
0.532% and 0.474%
Income elasticity of demand is 0.45 implies that when income increases by 1%,
demand for cigarettes rises by 0.45%
Positive coefficient for income means that cigarettes are normal goods i.e as
income increases, consumption increases

11. Effect of tax on cigarette price
(1) (2)
ln_price ln_price
ln_tax 0.981*** 0.104**
(4.80) (2.57)
dummy 1.441***
(35.47)
_cons 1.427*** 1.831***
(8.88) (65.96)
N 34 34
11
The after
tax price
depends
on the
before tax
price and
tax itself
Quantity consumed depends on both price and tax! This led to endogeneity
Hence, information on tax have been taken into account in order to know prices’
effects on quantity
Results revealed that when tax increases by 1%, price increases by 0.981% or by
0.104% respectively for model 1 and 2

12. Price and income elasticities for local and imported
cigarettes
12
We used same variables to estimate the new policy's effect
separately on:
Local cigarettes Imported cigarettes
Price elasticity is -0.412
Income elasticity is 0.521
Price elasticity is -0.518
Income elasticity is 0.721
1% increase in price will
reduce cigarette consumption
by 0.412% and 0.518
respectively for local and
imported cigarettes
1% increase in income will
increase cigarette
consumption by 0.521% and
0.721 respectively for local
and imported cigarettes
Briefly, price elasticity of imported cigarettes is more negative than that of domestic cigarettes
Meaning that smokers are more responsive
to price changes for imported cigarettes

13. Policy implications
13
High taxes can be a simple instrument to
influence tobacco prices and its consumption
Lead to an
increase in retail
price of cigarettes
since tax increases
tend to be passed
on to consumers
If prices are
significantly
different for
tobacco
products
Consumers may choose cheaper cigarettes rather than
reducing consumption
Or to adopt both
If they decide to switch to cheaper products, policy’s
effect on consumption will be less
We recommend:
Tobacco policy control with continuing price increases since it makes cigarettes less affordable to
juveniles and will lead to permanent reduction in consumption
As the policy aims to reduce consumption and effective tax collection based on non
manipulated tax bases;
The government has to tighten surveillance to counter chances of smuggling since continual
increase in prices may lead to the increase in illegal production and market smuggling
Implement policy based on empirical findings in order to minimize errors in estimating policy's
effects in terms of revenue collection

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