Tobacco sector: potential & illicit trade challenges
Pakistan's tobacco industry plays a pivotal role in the nation's economy, providing employment opportunities, generating substantial tax revenue and supporting the agricultural sector. However, it faces growing challenges, including stringent regulations and the pervasive issue of cigarette smuggling, which undermines legitimate businesses and erodes government revenue.
According to data from the Pakistan Bureau of Statistics (PBS) and industry reports, Pakistan's tobacco industry is valued at approximately $2.3 billion as of 2024, with a projected compound annual growth rate (CAGR) of 6.28% from 2025 to 2029. The cigarette segment dominates the market, with an estimated worth of $1.9 billion in 2025.
Despite its economic significance, the industry has witnessed a decline in legal cigarette sales, which fell 8.3% in 2024, from 36 billion to 33 billion sticks, according to statistics from the Federal Board of Revenue (FBR).
The tobacco sector remains a vital source of revenue, contributing Rs150 billion ($540 million) in taxes during fiscal year 2023-24, as reported by the FBR. This contribution includes federal excise duty (FED), sales tax and other levies, which help fund various government initiatives.
Tobacco farming continues to be a critical activity, particularly in Khyber-Pakhtunkhwa and Punjab, where smallholder farmers benefit from higher per-acre returns compared to traditional crops like wheat or maize.
Pakistan has implemented stringent anti-smoking policies in line with World Health Organisation (WHO) guidelines. These measures include higher taxes, graphical health warnings on packaging and bans on public smoking. In 2022-23, the FED on cigarettes saw a significant increase, raising the FED share in retail prices to 48% for low-tier brands and 68% for high-tier brands, according to the FBR.
While these measures aim to reduce smoking rates, they have, on the contrary, fueled the illicit cigarette trade, which accounted for 46 billion out of 79 billion cigarettes sold in 2024, as per an Oxford Economics study.
The illicit trade poses a significant threat to Pakistan's tobacco industry and the broader economy. Over the past decade, the country has lost over Rs567 billion in revenue due to smuggling and illegal manufacturing, as estimated by the FBR. In 2024 alone, legal cigarette sales dropped 8.3%, while the illicit market expanded.
The availability of 74 smuggled cigarette brands across the country, as reported by the FBR, reflects inadequate enforcement measures. Many of these smuggled brands evade high taxation, which makes them cheaper and more accessible, thereby exacerbating public health risks.
Pakistan's tobacco industry operates within a regional context that includes India, Bangladesh and Iran, each of which faces similar regulatory and economic challenges.
India's tobacco industry is one of the largest in the world, valued at $11 billion in 2024, according to the India Brand Equity Foundation, with a projected CAGR of 4.5% from 2025 to 2029. Cigarette sales in India are under pressure due to high taxes and stringent regulations, including an 85% graphical health warning mandate. Despite contributing over $7 billion in annual tax revenue, India's illicit cigarette trade accounts for nearly 25% of the market, reported the Euromonitor International.
Bangladesh's tobacco industry is valued at $1.8 billion, with a projected CAGR of 5.2%, said the Bangladesh Bureau of Statistics. The sector contributes $1.2 billion in taxes and employs thousands of farmers, particularly in Rangpur and Chittagong regions. Regulatory measures, including tax hikes and smoking bans, have led to illicit trade accounting for 20% of sales, showed WHO statistics. Smuggled products primarily enter the country from India and Myanmar, facilitated by weak border enforcement.
Iran's tobacco industry, valued at $1.2 billion, is heavily regulated, with a projected CAGR of 3.8%, according to the Iranian Customs Authority. Despite contributing $800 million in taxes, strict regulatory measures have caused legal sales to decline, fueling the growth of illicit trade. Smuggling, primarily from Afghanistan and Iraq, makes up 30% of the market.
All four countries — Pakistan, India, Bangladesh and Iran — struggle with the issue of smuggled cigarettes, which harm legitimate businesses and reduce government revenues. Pakistan's illicit trade share, at 58%, is the highest in the region, underscoring the urgent need for stronger enforcement measures.
Pakistan's high taxation and graphical health warnings have disproportionately impacted legal sales compared to its regional counterparts. Finding a balance between public health objectives and economic interests remains a critical challenge.
Despite these challenges, Pakistan's projected CAGR of 6.28% is the highest in the region, suggesting significant potential for expansion if the issue of illicit trade is addressed effectively.
Enhanced regional cooperation, particularly with India and Bangladesh, could help curb cross-border smuggling. Sharing best practices in enforcement, digital tracking systems and policy frameworks could prove mutually beneficial.
Pakistan's tobacco industry should also explore opportunities in reduced-risk products, such as e-cigarettes and heated tobacco, to align with global trends. Supporting farmers in transitioning to alternative crops could help mitigate the risks associated with regulatory pressures.
In conclusion, while Pakistan's tobacco industry remains a key economic contributor, it faces significant challenges from regulatory pressures and illicit trade. Proactive measures by industry stakeholders and the government, coupled with regional collaboration, will be essential to navigate these challenges and secure a sustainable future for the sector.
The writer is a Mechanical Engineer and is pursuing Master's degree