Pakistan world's largest illegal cigarette market
Pakistan is losing between Rs247 billion and Rs350 billion annually in tax revenue due to a rapidly expanding illegal cigarette market that now accounts for 54% of total consumption, according to a new economic assessment.
The findings were shared during The Express Tribune Podcast featuring experts from Oxford Economics and British American Tobacco Group (BAT), who warned that steep tax increases, weak enforcement, and structural market distortions have contributed to one of the world's largest illegal tobacco economies.
Speaking on the podcast, Andrew Logan, an economist from Oxford Economics, said the study estimates that 43.5 billion cigarettes sold in 2024-25 were illegal, largely driven by affordability pressures following a more than 200% increase in excise duties in 2022-23.
He added that illegal cigarettes are, on average, 64% cheaper than legal ones, creating strong incentives for consumers, particularly low-income households, to shift away from taxed products.
"This is fundamentally a demand and supply issue," he said, adding that excessive taxation has made legal cigarettes unaffordable for many consumers while simultaneously encouraging illegal supply chains.
On the supply side, Logan pointed to low profitability in the legal cigarette industry, weak implementation of track-and-trace systems, and regulatory gaps as key drivers of illegal trade. He said only 22 out of 477 cigarette brands in Pakistan are fully compliant with legal requirements.
Simon Trussler, Group Head of Fiscal Affairs and International Trade at BAT, said Pakistan stands out as the world's largest illegal cigarette market in absolute terms, though not necessarily in percentage share.
He cautioned that sharp tax increases do not always translate into higher revenue or lower consumption. "We've seen in several countries that tax shocks of this magnitude can actually expand illegal trade rather than reduce it," he said, citing examples such as Brazil and the UK.
Trussler added that Pakistan's cigarette tax revenues, when adjusted for inflation, are around 20% lower than they were 10 to 15 years ago, despite significantly higher tax rates.
He said total cigarette consumption has remained broadly stable at around 80 billion sticks annually, with demand shifting from the legal to the illegal market.
Logan further highlighted that Pakistan's regulatory environment is highly complex, involving excise duties, minimum pricing, and track-and-trace systems. However, enforcement remains uneven, allowing illegal trade to persist.
He added that 80% of illegal cigarettes in Pakistan are domestically produced, which, while problematic, makes the issue more traceable compared to countries where smuggling is primarily cross-border.
Both experts agreed that enforcement alone cannot resolve the issue. Trussler said illegal trade is driven by a mix of tax policy, enforcement gaps, and profit incentives for illegal operators. "Enforcement is important, but without a balanced fiscal policy, it cannot succeed on its own," he said.
He added that international experience suggests countries like Brazil have reduced illegal trade through stable and predictable taxation rather than large tax shocks.
Looking ahead, Logan said maintaining a stable excise regime could gradually shift consumption back into the legal market, potentially recovering significant lost revenue for the government.
Trussler added that reducing illegal trade could also encourage foreign investment, expand legitimate industry activity, and reduce organised crime linked to smuggling networks.
Both experts urged policymakers to adopt a predictable taxation framework, strengthen enforcement of existing systems rather than replacing them, and align policy with international best practices.
Despite current challenges, Trussler expressed cautious optimism about Pakistan's ability to address the issue, noting that the concentration of illegal production within the country makes the problem more manageable if consistent policies are maintained.