Public Disclosure Authorized GABON ASSESSMENT OF THE IMPACT OF Public Disclosure Authorized TOBACCO EXCISE TAX INCREASES ON PRICE, CONSUMPTION AND TAX REVENUE OVER 2018-2021 Public Disclosure Authorized D [Document subtitle] WORLD BANK GROUP April 25, 2019 Public Disclosure Authorized Table of Contents Executive Summary ........................................................................................................................ 3 Impact Assessment of New Tobacco Taxation in Gabon ................................................................ 4 Modelling Tobacco Tax Impact Assessment for 2018-2021 in Gabon ....................................... 4 Results ......................................................................................................................................... 5 Conclusions and recommendations ............................................................................................ 8 I. Introduction ........................................................................................................................... 10 II. Modelling the fiscal revenue impact of tobacco tax increases in Gabon ........................... 11 A. Current cigarette market – Retail Price and Consumption Trends ................................. 11 B. Gabon Tobacco Taxation ............................................................................................... 13 C. Assessing tobacco tax increases impact on consumption and tax revenue in Gabon .... 17 III. Conclusion and Policy Recommendations......................................................................... 26 ANNEX I - Box 1: Gabon Macro-Economic Indicators – Actual 2013-2017 & Projections 2018 - 2021............................................................................................................................................... 30 ANNEX I - Box 2: Gabon Tobacco Tax Scenarios – Assumptions Price and Income Elasticity for Upper Middle-income (UMIC) ..................................................................................................... 31 Annex II: Health Context of Tobacco Control in Gabon ............................................................. 32 1 TABLES Table 1: Gabon Current Tobacco Excise Tax Code and Proposed Tax Policy Measures for 2020-2021: Summary .................................................................................................................... 7 Table 2: Gabon Cigarettes Taxed (as aproxy to consumption) and Retail Prices Trends ... 12 Table 3: Ceiling rate of excise duties applied by other CEMAC member states ................. 13 Table 4: Rate ceiling for ad valorem excise duties applied by UEMOA Member States ..... 14 Table 5: Evolution of the cigarette tax rate in recent years .................................................... 15 Table 6: Gabon Cigarette Tax Structure: 2011-2018 .............................................................. 17 Table 7: Gabon Tobacco Excise Tax Structure - Alternative Policy Scenarios 2020-2021.. 19 Table 8: Summary of Cigarette Excise Tax Impact: 2018 Forecast and under New Tax Code over 2019-2021 ................................................................................................................... 22 Table 9: Summary of Cigarette Excise Tax Impact: 2018 Forecast and Proposed Tax Increases under Scenario 2 over 2020-2021.............................................................................. 25 2 Gabon Assessment of the Impact of Tobacco Excise Tax Increases on Price, Consumption and Tax Revenue over 2018-20211 Executive Summary The Health Impacts of Tobacco Use The scientific evidence accumulated over the past five decades is clear: tobacco kills. Smokers who begin early in adult life and do not stop smoking face a three-fold higher risk of death compared to otherwise similar non-smokers, resulting in a loss, on average, of at least one decade of life (Jha and Peto 2014). Smoking is the second-leading cause of death globally (GBD 2015 Collaborators). Both active smoking and exposure to secondhand smoke cause disease and kill prematurely (Marquez and Moreno-Dodson 2017). More than 7 million people die from tobacco use every year, a figure that is predicted to grow to more than 8 million a year by 2030, in the absence of intensified global action (WHO 2017). Annually, the number of deaths from tobacco-attributable diseases exceeds the deaths from HIV/AIDS, tuberculosis, and malaria combined (WHO 2008). Most of these deaths are due to direct tobacco use, while close to 10 percent of deaths are the result of non-smokers’ exposure to secondhand smoke. Developing countries and vulnerable groups face health risks associated with tobacco use, and with e-cigarettes. Low- and middle-income countries (LMICs) face an increasing burden of noncommunicable diseases (NCDs), which are now the leading cause of death in the world, killing 40 million people each year and representing 70 percent of all annual deaths (WHO 2018). Eighty percent of deaths due to tobacco-related NCDs—cancer, cardiovascular disease, chronic lung disease, and diabetes— occur in LMICs, straining health care systems, contributing to poverty, and posing a major barrier to development. An estimated 40 percent of the global economic costs of tobacco use are already borne by these countries, and there is a risk that the costs will escalate if effective and sustained tobacco control action is not supported over the short and medium term. In Gabon, according to available data from the Demographics and Health Survey (DHS), it is estimated that among people aged 15-49 years old, the prevalence of smoking was 22.3% among men and 2.9% among women. This prevalence of smoking was found to be the highest among the countries which conducted DHS in the African region. In Gabon, tobacco use is among the ten leading risk factors that drive the most death and disability (IHEM 2017). Policy Instruments for Tobacco Control Since 2005, 181 countries, including Gabon, have become parties to the Framework Convention on Tobacco Control (FCTC). The FCTC now covers nearly 90 percent of the world’s population. Over the past decade, progress has been made in expanding the coverage of the FCTC’s supply- and demand-reduction tobacco control measures (WHO 2015). The Effectiveness of Taxes on Tobacco Tobacco taxes are recognized as an effective policy tool to reduce tobacco use. As such, the prime objective of tobacco taxes is to improve health outcomes (World Bank 1999; Petit and Nagy 2016; Marquez and Moreno-Dodson 2017). To achieve this aim, aggressive increases in tobacco 1 This assessment was prepared by a team coordinated by Patricio V. Marquez, WBG, including Alberto Gonima (WBG Consultant, modelling work), as well as Sonia Barbara Ondo Ndong (WBG) and El Hadji Sidy DIOP (WBG Consultant), that collected required data, information, and comments on an initial draft. April 25, 2019. 3 taxes are required to influence cigarette smokers to stop or sharply cut back their tobacco consumption and to persuade young people not to initiate this addictive habit. The positive impacts of higher tobacco taxes and prices go beyond direct health gains and indirect benefits such as reduced health care expenditures and higher productivity (Furman 2016). Increasing tobacco taxes can also enlarge a country’s tax base to augment domestic resource mobilization (Marquez 2016a, 2016b, 2016c). This can expand the fiscal space for priority investments and programs, including the expansion of universal health coverage, education for all, and other activities to help countries achieve the SDGs. Impact Assessment of New Tobacco Taxation in Gabon The impact assessment on Gabonese cigarettes price, consumption and revenue carried out in this document, focuses on the tobacco excise tax that was sharply increase in 2018 with the adoption of the new tax code per Article 250 of the Gabonese Financial Law, which was amended effective July 2018. The government decision to adopt the recommendations for the higher specific excise tax of 300 XAF rather than the option of 200 XAF per 20 cigarettes pack, is effective as assessed in this report. Price and Income Elasticity of Demand Gabon is classified by the WBG as an upper-middle income country (UMIC). The price elasticity selection (-0.6 for economy imported brands and -0.4 for premium imported brands) is based on the findings of the International Agency for Research on Cancer (IARC, 2014) where “the price elasticity for demand for high income countries (HIC) is estimated to be -0.4 and between -0.6 and -0.8 in low- and middle-income countries (LMIC)”. The adopted income elasticity for smokers of premium brands is 0.4, like in high income countries, while for smokers of economy brands is 0.8, like in low-income countries. The selected price and income elasticity are considered to be a realistic assumption as assessed during the calibration of the simulation model (see Annex I Box 2, for further details). Modelling Tobacco Tax Impact Assessment for 2018-2021 in Gabon In conducting the modelling work, the World Bank Group (WBG) team considered the commitment of the Gabonese Government and the recommendations of the Gabonese Tax Administration Authority to: i) reduce tobacco consumption and hence associated public health risks; ii) increase the government excise tax revenue; iii) harmonize the tobacco excise tax structure in compliance with CEMAC provisions; and iv) introduce a mixed system for excise taxation (specific and ad valorem excise taxes) for selected consumption