85 billion cigarettes: The state of Egypt’s second largest generator of government revenues

Several financial experts are worrying about a global economic downturn – possibly the worst since the 2009 financial crisis, according to recent forecasts by the International Monetary Fund (IMF). With global economic growth expected to reach 3.3% in 2019 – down from a forecast of 3.7% in October 2018 – the tobacco industry remains one of the few essential, growing contributors.

The global $730-million Hookah market is expected to be worth $2.7 billion by the end of 2025, growing at a compound annual growth rate (CAGR) of 18% between 2019 and 2025, according to a summary released by Reports Monitor. The Middle East and Africa region has the largest share with revenues exceeding 69% of the global tobacco market.

With the government looking into expanding in different revenue-generating sectors to achieve economic growth, Egypt’s tobacco sector plays an essential role in revenue diversity as it paves its way through new investment opportunities.

Egypt produced 85 billion cigarettes in 2017/2018

The case of Egypt’s tobacco consumption
“Egypt produced 85 billion cigarettes in 2017/2018, compared to 83 billion in the previous [fiscal] year,” spokesman of Egypt’s primary tobacco producer Eastern Company Morsy Abu Amer tells Business Forward.

In October, the Central Agency for Public Mobilization and Statistics (CAPMAS), the Ministry of Health and the World Health Organization (WHO) announced that the cost of 100 cigarette packs is equivalent to almost 5% of the Egypt’s gross national product (GNP) per capita.

“The volume growth rate in Egypt’s tobacco market is closely linked to population growth,” consumer and healthcare analyst at EFG Hermes Nada Amin tells Business Forward.

The biggest player in the market
Despite the market being that large, once can find only very few players.

“Eastern Company is the second largest generator of government revenues after the Suez Canal; a statistic that illustrates how critical the institution is to the government,” Amin says.

The company produces all of Egypt’s cigarettes – 75% of manufactured volumes are Eastern Company’s own brands, while 25% are produced under license for multinational companies such as Philip Morris International and British American Tobacco (BAT).

“The finance ministry generated targeted tax revenues worth LE58 billion from the sector, as per the 2018/2019 investment budget,” head of the Tobacco Division at the Federation of Egyptian Chambers of Commerce Ibrahim Embaby tells Business Forward.

63% of Egyptian males will be smokers by 2020

Why the tobacco market will remain resilient
The tobacco industry has long been dominant in Egypt, given high consumer demand. Each smoker is said to spend around LE410 monthly on 15 to 24 cigarettes per day, placing Egypt on the higher end of global expenditure rates on smoking.

The WHO recently forecast that almost 63% of Egyptian males will be smokers by 2020, compared to the current 50%.

In February, the government offered a 4.5%-stake in Eastern Company for sale, according to Bloomberg, as part of the government’s program to sell additional stakes in state-owned companies.

Government revenues from the tobacco market
The finance ministry is targeting a total of LE67 billion worth of tax revenues in 2019 from the tobacco market alone, compared to LE60 billion attained in 2018.

“Current cigarette prices mainly consist of health insurance taxes and value-added taxes (VAT). The Eastern Company receives only 25% worth of revenues from the price of one cigarette pack, while the remaining 75% goes to tax revenues,” Abu Amer says.

Egypt’s total tax revenues targeted for 2019/2020 amount to LE364.6 billion, compared to LE312.6 billion in 2017/2018, indicating an increase of 16.6%.

85% of Eastern Company sales volumes are of brands priced at less than LE18 per pack

The consumers of the market
Although the prices of cigarettes have been increasing over the past years – in some cases by 300% from 2011 to 2016 – a number of smokers interviewed by Business Forward state that although giving up the habit of smoking in case of further hikes seems most reasonable, they would rather find alternatives than quit. These alternatives mainly include rolling cigarettes instead of buying packs.

In addition to local smokers’ loyalty to the tobacco market, several factors show that the market will not become weak. Eastern Company’s share price has multiplied by 373% since the currency’s floatation in 2016.

Year-on-year, Eastern Company’s revenues grew by 5% in nine months during 2018/2019, while posting a 27%-growth to LE13.4 billion worth of sales in 2017/2018. The company plans to carry out upgrades worth EGP 1.11 billion and complete ongoing projects at a total cost of EGP 51.8 million in 2019/2020.

In conclusion, Amin mentions that market trends are heading towards purchasing less costly products. Manufacturers are increasingly targeting the mid-segment of the market willing to pay LE18-30 per pack, while adding that “85% of Eastern Company sales volumes are of brands priced at less than LE18 per pack.”

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