Presentation by Precious C. Akanonu and Joseph Ishaku at the second annual Nigerian Tax Research Network meeting which took place in Abuja on 24th and 25th November 2018.

1. The Economics of Tobacco Control:
Modelling the Fiscal and Health Impacts
of Tobacco Control in Nigeria
Presentation by :
Precious C. Akanonu and Joseph Ishaku
for the
NTRN Conference

2. Outline
•Background
•Current State of Tobacco Taxes
•Methods and Data Sources
•Findings
•Conclusion and Recommendation

3. Background
Relatively low but rising prevalence
• Prevalence (GATS, 2012)
• 6 million adult smokers – 5.6% prevalence rate (GATS, 2017); 4% growth rate
• Higher among men (10%) than women (1.1%)
• Health and Economic costs (Tobacco Atlas, 2015)
• Tobacco related diseases account for about 17,500 deaths per year
• Economic losses are estimated at US$ 591 million
• Tobacco taxation considered the most effective tobacco control measure
• Reduces tobacco consumption
• Raises substantial government revenue

4. Current State of Tobacco Taxes in Nigeria
Low ad valorem excise tax rate; no specific excise tax
• Tobacco Market
• 920 million cigarette packs were consumed in 2015, 74% domestically-produced (NCS, 2017)
• Oligopolistic domestic market- BATN (75%)
• Average pack of cigarettes costs approximately ₦183.50 (60 cents) in 2017
• Tax level and structure
• Excise duty: 20% ad valorem on UCA (UCA at ₦60 = 20 cents); excise duty burden amounts to
6.49%(NCS, 2017) but WHO recommends 75%
• Imported cigarettes excluded from excise duty. Levied an import levy of 40% of CIF plus other small
levies (ETLS, CISS, import duty, and surcharge)
• 5% VAT applies to both domestic and imported.

5. Components of Retail Price
89%
6%
5%
NOT price Excise tax VAT
Domestically-
produced cigarettes
66%
13%
5%
8%
NOT price
Import levy
VAT
Others [ETLS, CISS, Import duty & Surcharge]
Imported cigarettes
25%
75%
NOT price Excise tax
Best practice

6. Methods and Data Sources

7. Conceptual Framework:
Tobacco Excise Tax Simulation Model
MODEL
INPUTS
• Average growth in net-of-
tax price
• Elasticities
•Taxes [excise duty, VAT,
import levy, etc.]
•Tax burden
POLICY
INTERVENTIONS
(PI)
PI Excise duty Import
levy
Ad
valorem
(%)
Specific
(₦) (%)
1 20 20 50
2 0 30 50
3 0 60 50
4 0 139 50
MEASURED
OUTCOMES
• Cigarette consumption
• Smoking prevalence
•Government revenue
•Net-of-tax revenue
•New Tax burden

9. Assumption Specification (εi ) Justification
Price elasticity of demand (licit
domestic market)
εp = 0.5 • The demand for imported cigarettes is more responsive to price
changes compared to demand for domestic cigarettes (Kostova et al.,
2013).
Price elasticity of demand (licit
imported market)
εp = 0.5
Price elasticity of demand (illicit
market)
εp = 0.9 • Illicit cigarettes are the cheapest brands
• Demand for the cheapest brands is most responsive to price changes,
as consumers cannot switch to any cheaper brand
Cross-price elasticity εcross−price =
−0.5
• As the price of licit cigarettes increase, consumers of the cheapest licit
brands will switch to buying illicit cigarettes which are cheaper (Tauras
et al., 2006)
Income elasticity (licit market) εi = 0.5 Illicit cigarettes are inferior goods --therefore, any increase in income will
lead to a decline in illicit cigarette consumption (Gallus, et al., 2006)
Income elasticity (illicit market) εi = − 0.5
Change in smoking prevalence C = 50%sp +
50%si
For every decrease in cigarette consumption, about 50% can be ascribed
to a decrease in smoking prevalence, while the other 50% ascribed to a
decrease in smoking intensity (TETSiM, 2017).

10. Policy Intervention Description
Policy intervention 1
(PI.1)
Keep 20 percent ad valorem tax, include ₦20 specific
excise duty, and increase import levy to 50 percent of
CIF per pack.
This policy intervention represents the government’s
plans to retain the present ad valorem duty on tobacco
while introducing a specific excise duty and increasing
import levy from (40 to 50 percent) for 2018.
Policy intervention 2
(PI.2)
Change to specific tax system, set the excise duty burden
to ₦30 per pack, and increase import levy to 50 percent
of CIF per pack.
This policy intervention simulates a complete change
from ad valorem to specific tax system set at ₦30 per
pack. Also, accommodates an increase in import levy to
50 percent.
Policy intervention 3
(PI.3)
Change to specific tax system, set the excise duty burden
to ₦60 per pack, and increase import levy to 50 percent
of CIF per pack.
This policy intervention simulates a complete change
from ad valorem to specific excise duty system set at
₦60 per pack. Also, accommodates an increase in import
levy to 50 percent.
Policy intervention 4
(PI.4)
Change to specific tax system, set the excise duty burden
to the equivalent of 75 percent of current retail price,
and increase import levy to 50 percent of CIF per pack.
This policy intervention simulates a complete change
from ad valorem to specific excise duty system in line
with the WHO recommended 75 percent benchmark;
which is equivalent to ₦139 specific tax per pack for
Nigeria. Also, accommodates an increase in import levy
to 50 percent.

11. Sensitivity Analysis I:
Income Growth & Industry Responses (One-off)

12. Sensitivity Analysis II:
Three-year Projection of Results
• 3-year projection of results accounting for:
• 12 possible scenarios showing 4 possible growth rates (no growth, and World Bank projection for
2017, 2018, 2019) against the 3 possible industry responses
• Simulates the 4 policy interventions in the base year (2016 prices)
• PI.1: Base year policy change + ₦20 increase in specific excise tax annually
• PI.2, PI.3, and PI.4: Base year policy change + 2 pp. increase in excise duty burden in
retail price annually

13. FINDINGS

14. Cigarette Consumption
• Consumption decreases in all scenarios under PI.3 and PI.4 –which impose higher duty
levels under specific tax systems, compared to PI.1 and PI.2 which impose lower levels
• Changes in tax/duty policy need to be substantial and operate under specific tax
system to have the most desired effect on cigarette consumption.

15. Smoking Prevalence
• Smoking prevalence decreases in all scenarios under PI.3 and PI.4 – which impose higher
tax levels and specific tax systems relative to PI.1 and P1.2.
• This implies that changes in tax policy need to be significant and operate under
specific tax system to have the desired effect on smoking prevalence.

16. Government Revenue
• Under all policy interventions and in all scenarios considered, government excise duty
revenue from cigarette sales will increase significantly.
• Excise duty revenues are most significant under specific tax system (as in PI.3 and PI.4) relative to
ad valorem tax system (as in PI.1).

17. Tax Burden
• Current excise duty burden is (at 6.49%), political will for tobacco control policies has to
be strong and consistent to gradually raise excise duty burden to meet up with the WHO-
recommended level of 75% of retail price.
• Higher excise duty burden (thus better outcome) on tobacco products under the policy
intervention in line with the WHO-recommendation

18. Three-year Projection Results I
(for S.1 only)
• Consistent trend of decreasing
consumption if PI are sustained
each year over the 3-year period.
800
820
840
860
880
900
Year 1 (S.1) Year 2 (S.1) Year 3 (S.1)
Cigarette Consumption (Million Packs)
PI.1 PI.2 PI.3 PI.4

19. Three-year Projection Results II
(for S.1 only)
• Consistent trend of increasing
government revenue if PI are
sustained each year over the 3-year
period.
10.0
30.0
50.0
70.0
90.0
Year 1 (S.1) Year 2 (S.1) Year 3 (S.1)
Excise Tax Revenue (Ns billion)
PI.1 PI.2 PI.3 PI.4

20. Conclusion and Recommendations
• There is an urgent need to raise taxes given the dangers to public health, benefits to public finance,
and given current low tobacco tax levels
• Tobacco taxation can yield a win-win situation in terms of public health and finance in Nigeria.
• Our findings suggest that substantial upward review of excise duty levels + a change to specific tax
system yields the most desirable outcomes.
• Beyond taxes/duties, an effective tobacco control tax policy will also require:
• Strengthening tax administration and revenue-collecting agencies are strengthen
• Other MPOWER strategies
• International cooperation

21. Thank you for listening!
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