A double-edged sword

Pakistan exports plummet from $14.38m to $12.06m worth of cigarette to the Middle East in FY 21-22

By Nisma Riaz

It is no secret that Pakistan is a major exporter of tobacco (raw materials), with its export portfolio having over 43 countries and generating around $65 million. However, in the last fiscal year, the country’s newly diversified tobacco exports, with finished tobacco products (cigarettes), enabled Pakistan to generate over $12 million from exports to Middle Eastern countries. What does that say about/mean for the tobacco industry of Pakistan?

The history of tobacco production in Pakistan

Tobacco trade from the subcontinent can be traced back to the Imperial Tobacco Company of British India, which became operational in South

Asia in 1905. This trade was taken over by Pakistan Tobacco Company (PTC), as a subsidiary of the British American Tobacco (BAT), in 1947, right after Pakistan’s independence. Now the tobacco industry comprises two multinational cigarette manufacturers, namely Pakistan Tobacco Company Limited (PAKL) and Philip Morris Pakistan Ltd (PMPK), that control nearly 60% of the country’s tobacco consumption market share, while the rest is split between more than 50 smaller local companies. It can be safely asserted that Pakistan has been a prominent exporter, as well as consumer of tobacco since the country came into existence. However, the growth of tobacco in the region has a different story entirely.

The importance of the tobacco industry is reflected in the fact that from no tobacco production at all in 1947, Pakistan accelerated to becoming a self-sustinent producer of tobacco by 1968. How did we get here? Long story short, efforts to grow tobacco began in 1948, with an experimental 20 acre farm, which soon uncovered Pakistan’s high potential for growing tobacco, especially Khyber Pakhtunkhwa’s (KP) ideal land and climate. Fast forward to 1968, Pakistan was no longer a net-importer of tobacco.

Yet the quality of tobacco being grown was not satisfactory enough for production by major companies, therefore was mostly utilised by much smaller local cigarette companies. To mitigate this issue the Pakistani government was urged to take serious steps in 1968, to support, improve, and develop the country’s tobacco industry. This is how the Pakistan Tobacco Board (Ali et al. 2015) came into existence. The formation of the Pakistan Tobacco Board (PTB) was the first step towards promoting and developing tobacco production and export. Since the establishment of the PTB, the board has been protecting the rights of tobacco growers, buyers, manufacturers of tobacco products, and traders engaged in tobacco processing. This accelerated the industry’s growth exponentially. So much so that tobacco is now grown in all four provinces of Pakistan, with KP being the most prominent one.

With more than 80% of KP’s population living in rural areas and agriculture accounting for over 30% of its provincial GDP, the tobacco industry remains a major catalyst for economic growth for the province. It is a major part of the local agrarian economy of KP, whereby its provincial economy is pegged majorly to the growth of tobacco. Of over 50,800 hectares of tobacco crops grown across the country, KP alone houses nearly 30,000 of these hectares.

Unlike other agricultural products of Pakistan, tobacco production has surprisingly been uncharacteristically well-performing. Pakistani land that is dedicated to growing tobacco exceeds over 50,000 hectares, with a yield per hectare of nearly 2.3 tonnes, adding up to a total production of 113.6 million kilograms of tobacco. The yield per hectare of 2.3 tonnes per hectare beats the world average production for tobacco, which is a mere 1.84 tonnes per hectare. Meanwhile in 2021, KP produced 71.38 million kilograms on 28,089 hectares of land, reaching an average yield of 2.5 tonnes per hectare — a 66% rise on the global average. But how did we get here?

This performance can be attributed to the unignorable attention that tobacco has received in Pakistan. The Pakistan Tobacco Board (PTB) not only promotes the interests of tobacco production, but also acts as a research arm. Adding to that, the existence of multinational players in the market translates into distinguished infrastructural and institutional support to tobacco production, something that other crops greatly lack. This directly counters one of the largest problems of agriculture in Pakistan— poor research, which consequently results in substandard quality of produce, dated farming techniques, and non-resistant seeds. The tobacco crop, on the other hand, does not only have serious backing, but an entire lobby that became the catalyst for Pakistan’s admirable agricultural production of tobacco. Owing to these factors, now Pakistan is one of the largest tobacco producers in the world, with some of the highest per-hectare yield.

The wasted potential of tobacco production

The abundant production of tobacco in Pakistan indicates that Pakistani tobacco has great potential to be a major exportable crop. Moreover, the rapidly growing demand for tobacco from South Asia over the past few years has added to this potential. The million dollar question now is whether this potential is rightly exploited?

Despite Pakistan having some of the highest yield and being one of the overall largest producers of tobacco, it is way below on the list of countries that have the most area under cultivation for tobacco. Research conducted by the Abdul Wali Khan University in Mardan shows that the area under tobacco cultivation in Pakistan was 43,134 hectares in 1980–1981, increasing to 50,800 hectares by 2019–2020. This indicates that the area under tobacco cultivation expanded over time due to its profitable nature. The same study highlighted that tobacco production in KP increased from 43,408 tonnes in 1980–1981 to 71,410 tonnes in 2019–2020, while the area under cultivation only rose by around 4,000 hectares during the same time. Whereas, the area under cultivation grew by around 16%, the total production rose by a comparative 65%. These figures indicate that during this time much efforts were expended to improve production techniques in the province, resulting in the significantly higher yields.

Why then has the area under yield not increased? Well, a major reason is that existing farms have been favoured by tobacco companies, thereby profiting from this relationship. The area under yield remains stagnant because the farm-profitability of tobacco is not as high as it should be, considering the yield numbers. The reason for this is that farmers do not process the leaves into the substance that is rolled into cigarettes directly or favour much from the overall profitability of tobacco. In fact, tobacco companies buy green leaves from the farmers and then process them into smokeable tobacco, an important value addition that attracts most profits. These tobacco leaves are purchased at absurdly low rates, even though tobacco farming requires a lot of expensive inputs, such as fertilisers, labour, mechanical power, pesticides etc., which discourages existing exploited farms from expanding and new farmers from planting the crop.

So, despite the great potential of the tobacco industry, tobacco production itself is not very lucrative at the farm level. Increasing the price of green tobacco leaves would significantly increase the demand for farm inputs, such as fertilisers, labour, mechanical power, pesticides, and farmyard manure as well. The increasing input prices will in turn have adverse consequences for tobacco production. Moreover, there has been a constant demand among tobacco farmers in KP to give tobacco ‘crop status’ which would protect it in many ways, as well as giving it a greater share of cess from the federal capital.

Such unfavourable economic conditions, coupled with multinational companies monopolising the industry not only hinder the true potential of tobacco production, but also exploit local farmers and tobacco companies. Despite these conditions, Pakistan has continued to be a major exporter of tobacco.

Pakistan’s tobacco industry’s journey from exporting raw materials to the complete product

Despite being one of the major global suppliers of tobacco, Pakistan has not always been a big player in the global cigarette trade. According to international sources, such as the Atlas of Harvard Economic Complexity, Pakistan exported cigarettes worth just $2000 to the US in 1997. Fast forward a decade, Pakistan exported $793,000 worth of cigarettes to 10 countries, with Saudi Arabia being the biggest importer, taking 40.7% of Pakistan’s total cigarette exports in calendar year 2017. Even though the number of countries importing cigarettes from Pakistan dipped from ten to six in calendar year 2019, Saudi Arabia, Bahrain, Thailand, UAE, UK and Libya collectively imported $3.66 million worth of cigarettes from Pakistan. This forward looking trend in cigarette imports continued in calendar year 2020, whereby Pakistan generated $31.1 million, marking an 88.2% rise in revenues from cigarette imports in just one year.

As we have established, Pakistan started exporting finished tobacco products, in the form of cigarettes, fairly recently. Local regulatory bodies have also been recording the developments in Pakistan’s cigarette exports. According to the statistics reported by the Pakistan Tobacco Board (PTB), the export of cigarettes, or at least notable export of cigarettes, started in the financial year 2019-20, with $7.89 million worth of sticks.

During the past 11 months, Pakistan collectively exported 22.39 million kilograms of tobacco worth over $65.2 million. The total export of tobacco and its products were $77.3 million in 2021-22. This marks the legible share of Pakistan in the global trade of tobacco, which is worth over $80 billion.

According to sources, from the total tobacco produced in the country, Pakistan has been exporting at least 30% of it in the form of raw material and finished tobacco products. The rest of the commodity is consumed in making cigarettes and other products for the domestic market.

Apart from the cigarette exports to the Middle East, Pakistan’s major tobacco export destinations included South Korea, Malaysia, Switzerland, Indonesia, Netherlands, UAE,

Paraguay, Saudi Arabia, Germany, Kazakhstan, Myanmar, UK, Kuwait, Poland, Australia, USA, Singapore, Canada, Ukraine, Philippines, Bangladesh, Belgium, Afghanistan, Italy, Russia, Yemen and Bulgaria.

How has this development played out in the last three years?

The export of finished tobacco products is a positive development for raw tobacco exporting countries, such as Pakistan. However, the export of cigarettes could not be accelerated as per expectations.

In the last fiscal year 2021-22, the country registered $12.1 million from cigarette exports to Middle Eastern countries. Even though Pakistan continued to export cigarettes to specific countries, the revenues generated from cigarette exports to the Gulf in the last fiscal year observed a dip of over $2 million, compared to the $14.38 million registered during FY 2020-21.

Gulf countries had earlier placed import orders of cigarettes worth $50 million in Pakistan. Currently, Pakistan exports cigarettes to Qatar, Saudi Arabia, UAE and Bahrain. Whereas the raw material for cigarettes is being exported to over 43 countries across the world, including the ones mentioned in the previous section.

Saudi Arabia has been a major destination of Pakistani cigarettes, with 800.76 million sticks worth $5.1 million. On the other hand, Bahrain imported 604.6 million sticks worth $ 4.5 million, Qatar imported 212.9 million sticks worth $ 1.4 million, and UAE imported 119 million sticks of cigarettes worth $ 0.92 during the FY 2021-22.

According to sources, the revenue of $7.89 million during July-June FY20 was the country’s first-ever major earning from the export of value-added tobacco products to the Middle East.

Although Pakistan exports tobacco to various countries, this was the first time that the country exported finished products in such large quantities. Experts believe that this was a step in the right direction and can potentially help the country capture more markets, as well as earn better returns in the future.

It is pertinent to mention that in 2020 Pakistan Tobacco Company (PTC) received an import order of cigarettes from Gulf countries, notably from Saudi Arabia.

What caused the decline in cigarette export revenues of FY21-22?

What potentially seemed like a major development in Pakistan’s tobacco exports took a bleak turn last year, with a $2 million dip in revenues compared to the previous year. What could have caused it?

“The importing country, after placing the order, had changed its standards for cigarettes, which ultimately caused a delay in the export of the product from Pakistan,” a PTB official told Profit. They added that PTC had later started exporting cigarettes after meeting the new standards of the Arab country.

According to the official, “Many cigarette manufacturing plants in Khyber Pakhtunkhwa were established in 1960s’ and 70s’, following which the importers had asked us to upgrade the quality of tobacco, paper, filters, packaging etc. These requirements had met successfully, paving the way to export of cigarettes to Middle Eastern countries in large volume and number.”

Regardless of last year’s setbacks, Pakistan remains a major exporter of tobacco, and now its value added products, across the world. n