ABSTRACT

Background  Pakistan has a large population of tobacco users, with about 24 million adults consuming tobacco products in one
form or another. There is a dearth of research on the impact of a reduction in tobacco use on Pakistan’s economy which can inform
policy-makers on the extent that tobacco control measures would affect macroeconomic indicators such as output and employment.
Objectives  The objective of this study is to quantify the changes in output, income and employment resulting from changes in cigarette
consumption and to quantify the impact of such changes on the overall economy. Methodology  The study uses the input–output table for
the fiscal year 2010–2011 for Pakistan’s economy, to estimate the output, income and employment multipliers. The Leontief input–output
model is used to estimate the sectorwise multiplier effects. It estimates direct, indirect and consumption-induced effects of changes in
tobacco use on the economy.
Results  The cigarette industry’s share in large-scale manufacturing and industrial employment is 1.1% and
0.3%, respectively. The estimates of gross output, income and employment multipliers for the cigarette industry have relatively small
magnitudes indicating minimal impact on the economy. A simulation analysis based on the latest estimates of price elasticity of cigarette and
input–output multipliers, shows that a 10% increase
in price will lead to an 11% reduction in cigarette consumption, which translates into annual savings of Pakistani Rupees (Rs) 16 billion by
households. Reduction in cigarette consumption will allow individuals to spend their savings on other commodities. For example, spending
this amount on food items will lead to a net increase of Rs 40 billion annual output of the economy. Conclusion  Reduction in tobacco
consumption will lead to initial losses to the economy but there will be considerable gains in output, employment and income due to
redistribution of tobacco expenditures.

INTRODUCTION
Pakistan is among the high-burden countries with respect to the prevalence of tobacco use and its implications for public health.
According to Global Adult Tobacco Survey 2014, 19.1% of adults in Pakistan used tobacco in any form, which translates into a
population of about 24 million adults. Consequently, the prevalence of tobacco-related diseases is also high and various estimates
indi-cate that tobacco use is associated with more than 108 800 deaths every year in the country. 1 Tobacco taxation is being used
as a policy measure at the governmental level for tobacco control in Pakistan. However, it is also argued that the tobacco industry

is not only making a significant contribution to large-scale manufacturing, but is also creating direct and indirect employment in
the country.
Several studies have shown that the demand for cigarettes and other tobacco products is significantly and negatively correlated
with the price of cigarettes in Pakistan.
Further, due to the pass- through effect of tobacco taxes on the price of cigarettes, a 10% increase in tobacco taxes will
increase the price of cigarettes by 8%. However, no prior studies estimated the impact of a reduction in tobacco use on the
tobacco industry, in general and the economy.

OBJECTIVE
The main objective of this research is to analyze the macroeconomic impacts of tobacco use in Pakistan. Focusing on the
cigarette manufacturing industry in Pakistan, the study estimates the impact of changes in final demand of cigarettes on the
output, income and employment in the country. The final demand for cigarettes may be influenced by several factors, including
taxes and non-price factors. However, this paper focuses only on the final demand and treats the impact of price changes on the
cigarette demand exogenously without looking into the relationship between prices and tax rate.
The organization of this paper is as follows. Section 3 provides a profile of the tobacco sector in Pakistan, including the
contribution of tobacco in agricultural output and employment, and its share in industrial output in the economy. The input–
output structure of the cigarette industry, including share of wages and consumption, is presented in section 4. Section 5 deals
with data and method-ology. Results and conclusions are presented in sections 6 and 7, respectively.

THE PROFILE OF TOBACCO SECTOR IN PAKISTAN

Pakistan ranked ninth in the world in raw tobacco production in 2016. Despite being one of the largest tobacco-growing
countries, tobacco remains a relatively minor crop in the agriculture sector of Pakistan, both in terms of area under cultivation
and value of production. Currently, tobacco crop accounts for only 0.42% of the total value of agricultural produce.
The area under the tobacco crop has not exceeded 0.25% of the total land under cultivation in the last two decades. As shown in
table 1, an area of 56 000 hectares was devoted to tobacco cultivation in 1999–2000, which declined to 47 000 hectares by 2017–
2018. Although it fluctuated until 2014– 2015, a consistent declining trend was observed in recent years. Correspondingly, the
percentage share
of tobacco in the total cropped area also declined from 0.25 to 0.2 during the same period.
In 2018, Pakistan produced 100 000 tones’ of raw tobacco. On average, the level of raw tobacco production in the country
remained slightly over 100 000 tonnes during 1999–2000 and 2017–2018. It peaked in 2013–2014 (130 000 tonnes) and showed a
downward trend thereafter. The decrease in production somewhat corresponds to the decrease in the area under cultivation. The
level of farm employment is also low in the sector. According to estimates, based on Pakistan’s Labour Force Survey (LFS)
2014–2015, only 8200 people are employed in the growing of tobacco, which constitutes only 0.03% of the total agriculture
employment in the country.
Similar to tobacco cropping, the contribution of the cigarette industry in the economy is also small in terms of output and
employment. Estimates show that the share of the cigarette industry in total industrial output (in terms of the value of production)
was only 1.11% in 2017–2018; it has decreased from 1.63% in 2010–2011. The price increase was the main cause of this decline
in the production of cigarettes as the prices of cigarettes increased by 84% during this period. Correspondingly, the share of the
cigarette industry in the overall employment also declined from 0.5% in 2010–2011 to 0.3% in 2017–2018. According to the
estimates based on LFS 2014– 2015, only 23 000 people were employed in this sector, which include both formal and informal
manufacturing of cigarettes and is computed based on the weighted share of employment of the tobacco industry in total
employment.

Between 2001 and 2018, the average domestic production of cigarettes was 60 billion sticks; the average per annum imports
and exports during this period was 0.6 billion sticks and 0.4 billion sticks per annum, respectively. So, domestic production is the
primary source of consumption of cigarettes in Pakistan.
The above indicator shows that the magnitude of the tobacco industry is relatively small. A change in the final demand for the
product will have a relatively small effect on the economy. But this requires analysis of the supply chain of the tobacco industry.

YEARS TOTAL CROPPED Area under tabacco Share of area under Production of
AREA (million tabacco cultivation% tobacco
hactares)
1999–2000 22.7 56 0.25 108
2004–2005 22.8 50 0.22 101
2009–2010 23.9 56 0.23 119
2010–2011 22.7 51 0.22 103
2011–2012 22.5 46 0.20 98
2012–2013 22.6 50 0.22 108
2013–2014 22.2 49 0.22 130
2014–2015 23.3 54 0.23 120
2015–2016 23.7 53 0.22 116
2016–2017 23.3 47 0.20 100
2017–2018 23.3 47 0.20 100
2018–2019 24.2 48 0.22 116
2019–2020 23.3 54 0.23 120

Source: Economic Survey of Pakistan, Finance Division, Government of Pakistan.

Years Share in industrial production* Share in industrial employment

2010–2011 1.63 0.5
2014–2015 1.37 0.3
2017–2018 1.11 -

Source, Economic Survey of Pakistan and Labour Force Survey of Pakistan. *At constant factor cost of 2005–
2006.

Cigarette industry
Agriculture 27 530
Industry 42 101
Services 213 418
A.Intermediate input use across sector 283 049
B.Value added 286 993
C.Total Value of output (A+B) 570 041

Source: Input–output table of Pakistan economy 2010–2011, prepared by Federal Board of Revenue (FBR).

THE INPUT–OUTPUT STRUCTURE OF THE CIGARETTE INDUSTRY

The input–output (IO) table 2010–2011 provides structural information about the tobacco sector (manufacturing of cigarette in
Pakistan and its linkages with the rest of the economy. It is 81 by 81 matrix, which gives information about 81 sectors of the
economy and provides information about the tobacco industry, separately. It divides the output of industry into the supply to
other industries for intermediate consumption and value-added (compensation of employees, consumption of fixed capital and
operating surplus). The demand side consists of the intermediate demand by industry, the demand for investment, the final
household consumption, the final public consumption and the net exports. The changes in prices and indirect taxes will change
the final demand vector.
According to the IO table, the total value of the output of the cigarette industry was Rs 570.0 billion. In order to produce this
output, the cigarette industry used intermediate inputs of Rs 283 billion from the agriculture, industry and services sectors. At the
sector level, the cigarette industry used the input of Rs 0.37 from services, Rs 0.07 from industry and Rs 0.05 from agriculture
sectors to produce an output of Rs 1. The value added by the cigarette industry was Rs 287 billion. One important finding is that
the supply of this sector is not used as an input in other sectors since cigarettes are the final product directly used for consumption
by individuals. In other words, the cigarette industry has no forward linkages, it has only back-ward linkages.

The share of wages and consumption

The household sector receives wages for work done in the cigarette industry and spends some or all of this wage income on
goods and services. Using the input–output table, shows the wages and salaries received by employees working in the cigarette
industry and final private consumption expenditure by the household on cigarettes. The share of wages in the total value of the
output of the cigarette industry is 1.14%, which is much lower compared with other sectors of the economy—the average share of
wages in the total value of the output of all sectors of the economy is more than 10%. This indicates that the size of the income
multiplier for the cigarette industry is relatively low. The share of final private consumption in total private consumption is 3%—
showing a relatively large consumption-induced effect on the cigarette industry multipliers.

Heads 2010–2011 value

Wages and salaries 6495
Total value of output 570 041
Share in the total value of output 1.14%
Household consumption expenditures on cigarettes 467 825
Total household expenditures 3%

Source: Input–output table of Pakistan economy 2010–2011, prepared by Federal Board of Revenue (FBR).

Output multipliers
We now present the output multiplier effects for changes in demand for the cigarette industry. The output multiplier for the
cigarette industry is defined as the total value of production by all industries of the economy required to produce one extra rupee
worth of final demand for that industry’s output.
To estimate the output multipliers, the first task is to estimate the technical coefficient for cigarette manufacturing, which indi-
cates the direct effect of changes in the production of the cigarette industry on other sectors/industries. As shown earlier, cigarette
production used intermediate inputs of Rs 0.5 to produce an output of Rs 1.0, implying that if the final demand of the sector is
decreased by Rs 1.0 billion, the cigarette industry will reduce its demand for input by Rs 0.5 billion from other sectors. Presents
the industry wise breakdown of the direct effect of changes in the output of the cigarette industry on the other sectors. The major
sectors with backward linkages to the cigarette industry include trade, paper and printing, tobacco and roads. These four sectors
would absorb 97% of the total direct effect, with the trade sector being the largest. The trade sector includes wholesale and retail
trade which is a major economic activity involving purchasing inputs and selling the final output; paper and printing is the
second-largest input supplier as the paper is used as a major input in packing and wrapping of ciga-*-*/*//rettes. Raw tobacco is
also an important input for cigarettes, and finally, transport is a major input for supplying these inputs to the cigarette industry
and supplying final products in the market.
 The indirect effect shows the impact on the sectors which supply inputs to the input-supplying sector of the cigarette industry.
The indirect effect is estimated to be 0.41.
Provides the estimates of type I (simple) output multi-plier and type II (total) output multiplier. The simple multi-plier does not
include the changes in output due to changes in consumption and wages. Accordingly, the value of the simple multiplier (1.91)
indicates that a Rs 1.0 billion decrease in final demand for cigarettes will reduce the output of the economy by Rs 1.9 billion.
Consumption expenditure by households also leads to additional demand (or output) in the economy. This induced production
of extra goods and services is referred to as the consumption-induced effect. The total multipliers are calculated considering the
initial effects, the production-induced effects and the consumption-induced effects. The total output multi-plier for the ‘cigarette
industry’ in Pakistan is estimated to be 2.90. This implies that an additional output of Rs 2.9 is required from all industries to
satisfy an increased consumption of Rs

1.0 in the cigarette industry, as well as to satisfy the additional demand generated by the increased wages, salaries and supple-
ments resulting from all increased output. In other words, the output of the economy will decrease by Rs 2.9 billion due to a
reduction of Rs 1.0 billion in the final demand for cigarettes.
It is important to note that the magnitude of the output multi-plier of the cigarette industry is on the smaller side compared with
other sectors of the economy. For instance, the magnitude of multipliers of the top five sectors ranges between 5.37 and 8.59,
which include beverages, cooking oil, fuel, sugar, and construction. The bottom five sectors are insurance, slaughtering, pulses,
retail trade, and housing where the size of multi-pliers lies between 2.35 and 2.57.

Industries Value of input (Rs million) Direct effect (Value of Input/total

value of the output of the cigarette
industry)
Trade 188 358 0.330
Paper and printing 38 240 0.067
Tobacco 27 343 0.048
Road 20 664 0.036
Other chemicals 1878 0.003
Railway 1861 0.003
Insurance 1565 0.003
Electricity, water works and supply 866 0.002
Refined petroleum 402 0.001
Others sectors 283 049

Type of multipliers Cigarette industry

A.Initial effect 1.000
B.Direct effect 0.50
C.Indirect effect 0.41
D.Type I (simple) 1.91
E.Consumption-induced effect (F-D) 0.99
F.Type II (total) multiplier 2.90

Income multipliers

The wage income multiplier is defined as the change in the total value of income from wages, salaries and
supplements due to change in the final demand for the output of an industry. As mentioned earlier, the share of
wages and salaries in the cigarette industry is 1.14% of the total value of the output of the cigarette industry (table
4), implying that a change in final demand would lead to a small wage income effect.
Estimates for type I and type II wage income multipliers for the cigarette industry in Pakistan are presented in table
7. The results show that a reduction of Rs1.0 billion in the final demand for cigarettes will have an initial effect of Rs
0.008 billion on the income of the people employed in the cigarette industry. The sectors which directly supply
inputs to the cigarette industry will decrease the demand for labour and their wage bill will be reduced by Rs 0.065 
billion (direct effect). The wage bill of the sectors that supply inputs to the input-supplying sector of the tobacco
industry will be reduced by Rs 0.15 billion (indi-rect effect). The simple wage income multiplier shows that the
wage income in the economy will decline by Rs 0.167 billion. Subsequently, this decrease in the income level will
lead to lower consumption expenditure. The estimates show that due to a decrease in final demand, the
consumption-induced effect on income will be Rs 0.217 billion.

Finally, the value of the total wage income multiplier (0.385) implies that due to a decrease of Rs 1.0 billion in the
final demand of cigarettes, the income level in the economy will decline by Rs

0.385 billion. Thus, the impact of the wage income multiplier is very small compared with the other sectors of the economy.

Type of multipliers Cigarette

industry
A.Initial effect (share of wages % of total value of 0.008
output)
B.Direct effect 0.065
C.Indirect effect 0.146
D.Simple multiplier 0.167
E.Consumption-induced effect (F–C) 0.217
F.Total multiplier 0.385

Employment multipliers
Employment multipliers measure the effect on employment of one-unit change in the final demand for cigarettes. The first step is
to estimate the employment coefficient for all the sectors included in the input–output table, which are calcu-lated by dividing the
number of employed persons in a given industry by the total value of the output of that industry. Gives the employment
coefficients of a few sectors

for comparison. The employment coefficient shows that if the output of the cigarette industry decreases by Rs 1 billion,
employment in this sector will decrease by 54 persons. It is evident that the employment effect in the cigarette industry is the
lowest among all other sectors of the economy since it is not a labor-intensive sector.
The effect based on the employment coefficient can be seen as the initial effect. Further, the direct effect and indi-rect effect
are estimated to be 27 and 21, respectively. Thus, the simple employment multiplier shows that the overall employment will be
reduced by 101 persons. Finally, after adjusting for the consumption-induced effect, the value of the total employment multiplier
indicates that due to the Rs 1 billion decrease in the final demand of cigarettes, the total employment loss to the economy would
only be 121 persons.

Employment coefficient

Output People employed Employment coefficient

C=B/A*1000
Agriculture 5658 19 301 3411
Food products 2960 699 236
Cigarettes 570 31 54
Textiles 2269 1008 444

Employment multipliers for the cigarette industry (to produce an output of RS 1 billion)
Type of multipliers Cigarette industry
A.Initial effect (employment coefficient) 54
B.Direct effect 27
C.Indirect effect 21
D.Simple Multiplier (type I multiplier) 101
E.Consumption-induced effect (F–D) 20
Simulation: expenditure switching from tobacco to food items
The reduction in cigarette consumption would allow individ-uals to spend their savings on other commodities depending on their
consumption preferences. While the analysis of consump-tion elasticities is beyond the scope of the study, we developed a
scenario to simulate the macroeconomic impact of a tobacco-free economy. This simulation is based on the following
assumptions:
Based on the latest estimates of price elasticity of demand, The analysis shows that a 10% increase in price will lead to an 11%
reduction in cigarette consumption. Given the total esti-mated expenditure of Rs 150 billion on cigarettes, this would translate
into a household saving of Rs 16 billion in a year, due to a reduction in consumption expenditure on tobacco prod-ucts. We
conducted a simulation exercise with the assumption that individuals would spend 50% of the saved income (from reduced
tobacco use) on food-related products and 50% on the education of their children. To compute the redirectional impact of tobacco
use we used food and education multipliers. The results show that a Rs 16 billion reduction in consumer expen-diture on
cigarettes will lead to a net increase of Rs 40 billion in the output of the economy. Initially, reducing tobacco consump-tion will
reduce the output of the economy by Rs 46 billion due to a reduction in cigarette industry production. But consumers will spend
the money that they saved from not using tobacco on other goods and services. This will lead to an increase in output by Rs 86 
billion. Therefore, the net effect would be a Rs 40 billion increase in output. Similarly, the effects on income and employment are
also positive .

One of the limitations of the study is that it assumes a 100% redirectional impact of tobacco use. It treats tobacco taxes and prices
exogenously. This is a general limitation of the IO model, which can be addressed by using a computational general equilib-rium
model, but the latter requires an updated social accounting matrix (SAM). Unfortunately, the latest available SAM of Paki-stan is
outdated and it does not provide information about the tobacco industry separately.

CONCLUSIONS AND POLICY IMPLICATIONS

The findings show a small contribution of the tobacco sector into the national economy of Pakistan. For instance, despite being
one of the largest tobacco-growing countries, tobacco is not a major crop in Pakistan and accounts for less than half of a percent
of the total value of agricultural produce and only 0.2% of the total area under cultivation. Likewise, the cigarette
industry is not a major contributor in the manufacturing sector and Gross Domestic Product (GDP), with a 1% share in total value
added of large-scale manufacturing and less than a half per cent in industrial employment.
The macroeconomic impacts of reducing cigarette consump-tion were looked into by tracing out backward and forward
linkages. The estimates of gross output, income, and employ-ment multipliers based on the input- output table for the ciga-rette
industry have relatively small magnitudes. This implies that changes in consumption of cigarettes will generate relatively small
impacts on the other sectors of the economy in general and on the overall economy. Reduction in tobacco consumption will lead
to initial losses to the economy but there will be consid-erable gains in output, employment and income if expenditures are
redirected to other sectors with high multipliers.
These findings are in contradiction to the tobacco industry’s claim that a decline in consumption of cigarettes leads to a huge
loss in output, employment and income of the people working in the tobacco sector and allied activities. Therefore, the findings
suggest adopting policies to reduce tobacco use will not have any significant impact on the economy.

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