Islamabad (Ghulam Murtaza): In a decisive move to curb the booming illicit tobacco market, the federal government, in coordination with provincial authorities, has announced a nationwide crackdown on the sale of illegal cigarettes.

Speaking at the launch ceremony of a research report by Oxford Economics on illicit cigarette trade in Pakistan, Minister of State for Finance Bilal Azhar Kayani has said that provincial governments will intensify enforcement operations to eliminate the widespread availability of untaxed cigarette brands.

He stressed that controlling the illegal cigarette trade has become “unavoidable,” warning that the unchecked market is inflicting heavy losses on the national exchequer, undermining the documented economy, and discouraging honest taxpayers.

He added that several illegal cigarette manufacturing units have already been shut down, while raids against retailers involved in the sale of illicit products are ongoing.

According to the report by Oxford Economics, An Economic Assessment of the Illicit Cigarette Market in Pakistan, illicit cigarettes now account for more than half of Pakistan’s tobacco market, according to a new study by Oxford Economics, underscoring the scale of illegal trade and its impact on public revenues and the economy.

Report further revealed that illicit cigarettes in the country amount to 43.5 billion cigarettes, placing Pakistan amongst the highest illicit cigarette markets globally. While total cigarette consumption has remained broadly stable at around 80 billion sticks annually over the past decade, legal sales have been steadily displaced by illicit products.

The report identifies sharp excise duty increases as a key driver of this shift. Between Q1 2022 and Q2 2023, real excise taxes rose by 107%, significantly widening the price gap between legal and illegal cigarettes. Illicit cigarettes remained approximately 36% cheaper on average, encouraging widespread down trading.

“The evidence highlights the risks associated with sharp and unpredictable tax increases,” said Andrew Logan, Director of Industry Consulting at Oxford Economics, speaking at the report launch. “Pakistan’s experience shows how quickly consumption shifts when affordability and enforcement gaps widen.”

On the supply side, the illicit market is primarily domestic. Within the illegal cigarette segment, around 64% of tax-evaded cigarettes are produced within Pakistan, primarily in Azad Jammu and Kashmir (AJK) and Khyber Pakhtunkhwa. Smuggling accounts for the remaining 36%, largely via routes through Afghanistan with cigarette brands linked to the UAE and South Korea. Illicit trade is exacerbated by porous borders, organized criminal networks, and weak enforcement.

“These findings underline the need for sustained, coordinated enforcement across the entire supply chain,” added Logan. “Without policy predictability and consistent enforcement, illicit operators will continue to undermine revenue collection and legitimate businesses.”

Existing interventions have shown limited impact. The Track and Trace System remains poorly enforced, with only 22 of 477 brands fully compliant, while illicit market share rose from 39% to 54% after its introduction. Similarly, the advance adjustable excise on acetate tow has driven misdeclaration and smuggling of raw materials rather than curbing illicit production.

Oxford Economics alarms that revenue losses from illegal cigarettes, estimated between PKR 274 billion and PKR 343 billion, may exceed total excise collections from legal sales in Pakistan.

The report concludes that reducing illicit trade will require a coordinated, long term approach, combining predictable taxation with stronger enforcement across borders, supply chains, retail markets, and nationwide track and trace compliance.