Higher Cigarette Excise; Indonesia’s Tobacco Industry in Trouble?
One of the last decisions of the Susilo Bambang Yudhoyono administration before being replaced by the new Joko Widodo-led administration was to raise the tobacco excise by an average of 8.7 percent per 1 January 2015. This excise will be applied to all tobacco-related manufactured products. The higher excise, stipulated by a Finance Ministry decree, will boost state income and will also help to curb smoking. About 65 percent of Indonesian men smoke, supported by the cheap price of a package of cigarettes.
Raw materials used for the production of tobacco-related products are mostly sourced domestically and - in combination with cheap labour - makes production costs relatively low, thus resulting in the cheap price of cigarettes in Indonesia.
The excise on hand-rolled clove cigarettes (kretek) currently still ranges between IDR 80 and IDR 275 per cigarette but will be raised by 6.25 percent. The excise on machine-rolled clove cigarettes (kretek) now ranges from IDR 245 to IDR 375 but will be raised by 16.9 percent. The smaller excise increase for mass-produced, hand-rolled clove cigarettes is done in consideration of the large numbers of Indonesians employed in that segment. Recently, the hand-rolled clove segment has experienced a difficult time as Indonesian consumers increasingly prefer to smoke machine-rolled cigarettes. In May 2014, HM Sampoerna (Indonesia's largest tobacco company) decided to close two of its seven hand-rolled cigarette factories in East Java because the company needed to restructure due to its declining market share in the country's hand-rolled cigarettes industry. This move affected almost 5,000 workers. The company’s market share declined from 30.4 percent in 2009 to 23.1 percent in 2013.
The Indonesian government targets state revenue of IDR 120.5 trillion (about USD $10 billion) from cigarette excises in 2015, up 9.1 percent from the target of IDR 111 trillion (USD $9.2 billion) in 2014.
Earlier this year (in June 2014), Yudhoyono introduced a new government regulation that required graphic warnings on the cigarette packages in an attempt to discourage smoking in Indonesia.
The government’s 2007-2020 road map for the domestic tobacco industry sees national cigarette production decline to 260 billion sticks per year by 2020. However, the country’s tobacco manufacturers usually exceed government targets. Last year, Indonesia’s total cigarettes production numbered 360 billion cigarettes. However, cigarette production fell by 7 percent year-on-year in 2013 from an increase of 9 percent the previous year.
Indonesia remains one of the few countries (and reportedly the only country in the Asia-Pacific) that has not yet ratified the Framework Convention on Tobacco Control (FCTC) of the World Health Organization (WHO). This treaty aims “to protect present and future generations from the devastating health, social, environmental and economic consequences of tobacco consumption and exposure to tobacco smoke" through a set of universal standards stating the dangers of tobacco and limiting its use worldwide.
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