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Shrinking tobacco cultivation

December 19, 2016

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Tobacco plantation has shrunk from a peak of 43,000 hectares a few years ago to around 34,000 hectares today, owing to rising costs and a dwindling exports market.

Tobacco is grown on around 0.25pc of total irrigated land. The crop plays an important role in the country’s economy by generating income and employment through its farming, manufacturing, distribution and retail.

The earning from export proceeds of tobacco and its products fell to Rs1.52bn in 2014-15 from Rs2.33bn in the year 2009-10, a decline of 35pc. This fall showcases structural and policy issues prevalent in the sector.

The Pakistan Tobacco Board (PTB), a subsidiary of the commerce ministry, based in Peshawar, regulates, controls, promotes exports and fixes grading standards, among other things.

The tobacco cash crop is highly regulated. As per rules, the PTB fixes and distributes each year’s export allotment of tobacco and tobacco products to companies. Every exporter is bound to export the full amount of the allotted value.

No tobacco or tobacco product can be exported except under an NOC by the Board. Similarly, tobacco seed can only be exported under a permit issued by the PTB or the federal government.

Data compiled by the PTB shows a work force of 350,000, directly and indirectly employed within the tobacco industry. The sector generates an annual income of around Rs300bn and is a source of livelihood for 1.2m people.

There are 75,000 tobacco growers in Pakistan. Out of these more than 45,000 growers are located in KP producing 95pc of Flue Cured Virginia (FCV) over an area of 30,000 hectares. They are in the districts of Swabi, Mardan, Charsadda, Buner and Mansehra.

On average 80-85m kg of FCV, which is the main ingredient for cigarettes, is produced by growers of these districts every year.

Average production of other varieties — like Dark Air cured, White Patta, and Burley— is around 16m kg. These varieties are mostly used in smoking pipes, chillum and naswar, etc consumed in the domestic market.

Naswar is mostly consumed in KP followed by Punjab and Sindh, respectively.

The chairman of the PTB, Dr Ikram Ghani told Dawn that the fall in growing areas of tobacco occurred mainly because of two reasons.

First is a government mandated consistent increase in the minimum price. Pakistan’s tobacco price has become higher than that produced in India and Bangladesh. As a result the demand for the country’s tobacco has declined drastically.

This increase has also discouraged the cultivation of high quality tobacco. Low quality tobacco-based cigarettes are mostly consumed in the domestic market. The fixation of value is the first area of concern of the sector, he said.

Mr. Ghani said that the PTB has developed new areas for cultivation of high quality tobacco. The best quality is now being sown in Mansehra, followed by the second and third best quality in Buneer and Charsadda, respectively.

“We also plan to grow quality tobacco in Upper Dir, Bajwar and Khurram tribal agencies”, the chairman said.

A tobacco farmer said input cost has increased manifold due to an increase in the price of pesticides, fertilisers and woods-used for curing. Tobacco curing consumes a large amount of firewood, while sowing is still carried out through traditional labour intensive methods.

The chairman further added the board was working on a proposal to introduce mechanisation to help farmers use other means to cure tobacco.

The board is also working with the Bank of Khyber to arrange loans for tobacco growers, as the Agriculture Development Bank was not extending them any loans. “We are also working with insurance companies to manage tobacco crop insurance”, the chairman said.

Official data shows that Pakistan exported 4.27m kg of tobacco to 21 countries in 2014-15 against 6.67m kg in the previous year, a decline of 36pc. The decline was also seen in exports of cigarettes which fell to 30.41m in 2014-15 from 83.96m in the previous year, a decline of 64pc.

There are 34 companies registered with the PTB dealing in tobacco and cigarette export. Interestingly, these exports are confined to three markets—Saudi Arabia, followed by Oman and the UAE.

Asked why only one company, Phillip Morris, is involved in cigarette exports, the chairman said other companies have brand issues. They produce brands which cannot be exported. “We are working with other companies to encourage them to explore markets for their products and have asked them to submit their company profiles which will then be shared with international buyers”.

The 33 other companies are engaged in exporting raw tobacco to 21 countries. Malaysia is the leading export market for tobacco exports, with 28pc of total tobacco exports. 23pc goes to the UK, Belgium, Greece, Germany, Poland and Netherland; while Saudi Arabia and the UAE together stand at 19.4pc.

29.6pc of the remaining export goes to Myanmar, Philippines, Paraguay, Ukraine, Indonesia, Turkey, Belarus, and Kuwait. A few thousand kilograms are also exported to Australia and the US.

The tobacco crop saves in import substitution and also adds to national treasury through taxes. The sector is also one of the main contributors to the government exchequer and sourced more than Rs104bn in Federal Excise Duty/ Sales Tax in FY 2014-15.

According to the PTB, the complexities of tobacco export and manufacture are well known. Tobacco trade has peculiar features: for example the US, being an important exporter of un-manufactured tobacco, is the leading importer of tobacco needed for blending purposes. At the international level, the quality and price are the principal determining factors in its trade, with stiff competition.

The newly evolved strategy of the PTB for export promotion is to encourage manufacturers to participate in exhibitions abroad, send trade delegations, especially to the Central Asian States, and arrange meetings with trade officers posted in the country’s missions abroad.

Published in Dawn, Business & Finance weekly, December 19th, 2016