The significance of the tobacco product manufacturing to Poland’s economy

This report, prepared by a team of economists from CASE, is a continuation of the 2018 analysis The significance of the tobacco product manufacturing to Poland’s economy commissioned by JTI Polska Sp. z o.o. The purpose of the research whose results are presented in this report is to assess the economic significance, challenges and development prospects of the tobacco product manufacturing, trade and distribution sector in Poland. In the report we analyze a cross-section of the tobacco industry and its significance for the economy as a whole. We also present the significant barriers to the sector’s growth, i.e. the illicit market, costs of compliance and regulatory uncertainty, and we also model the long-term macroeconomic effects of potential changes in the industry. To the best of our knowledge, at the moment this is the most comprehensive economic study of the sector.

Key information and conclusions:

• The tobacco sector is an important part of the Polish economy. The estimated value of tobacco products manufactured in 2019 was PLN 45.9 billion.

• The tobacco product manufacturing chain includes agriculture, tobacco buying organizations, raw tobacco processors, tobacco product manufacturers and the distribution and sales. Value is added at each step of the chain and it covers the wages and company profits. In 2019 the sector generated PLN 10.9 billion of value added, of which PLN 6.8 billion was created directly in the tobacco processing and tobacco product manufacturing and the remaining part was generated in other involved sectors. This means that about 0.5% of all income in the Polish economy (measured as GDP) and 2.2% of added value of the Polish industry in 2019 was created in the tobacco sector.

• The tobacco sector makes a significant contribution to the stock of domestic physical capital, thus contributing to long-term economic growth. In 2018 investments in the tobacco industry constituted 1.3% of total industrial investment in Poland. From 2014 to 2018, investment outlays in the sector grew by about 124% (i.e. growth from PLN 600 million to PLN 1.4 billion), significantly faster than the average for all industry. We estimate that in 2019 investment outlays in the tobacco sector were about PLN 1.3 billion.

• Poland is EU’s second-largest producer of cigarettes and the third by volume in production of smoking tobacco. In 2010 Poland produced about 144 billion cigarettes, exceeding 213 billion in 2019, an increase of about 47% (an average of 5.3% a year). Expressed in prices including domestic taxes on tobacco products.

• Tobacco manufacturing is export-oriented. Four out of every five cigarettes produced in Poland are exported. About 88% of the value added created in the production chain of tobacco products is generated in exported output. The total value of tobacco product exports and unprocessed tobacco in 2019 was PLN 15.9 billion. In the past decade, such exports have clearly grown: by 10.2% in relation to 2018 and as much as by 232% in relation to 2010. Cigarette exports account for 84.8% of export value. More than 93% of the sector’s output goes to the EU market.

• In 2019 the estimated value of the domestic tobacco product market stood at PLN 32.6 billion. The majority was accounted for by traditional tobacco products, but the electronic cigarette market grew dynamically, as did the market for innovative products, meaning tobacco heating systems, offered in Poland by two tobacco companies.

• The estimated total tax revenue from production and sale of tobacco products stood at PLN 28.7 billion in 2019. Total income from excise tax on ready tobacco products was about PLN 20.9 billion; excise tax on raw tobacco boosted the budget by another PLN 800 million. VAT revenue from final tobacco products stood at PLN 6.4 billion in 2019. Total revenue from income tax levied on employees of the tobacco product manufacturing and related sectors is estimated at PLN 168.5 million. Total revenue from corporate income tax on profits earned in the entire chain of tobacco product manufacturing and distribution was about PLN 384 million.

• We estimate the number of full-time jobs that exist thanks to the tobacco sector, both directly and in related sectors, at 33,300, full time equivalent. This figure includes the full-time jobs in manufacturing of tobacco products, materials and machinery to produce them, tobacco cultivation and the wholesale and retail trade sector. The number of people in 2019 whose job was connected to tobacco cultivation, manufacturing and distribution of tobacco products, is estimated at more than 600,000.

• The illicit market, meaning the smuggling, production and trade of illegal products is negatively affecting both tax revenue and the operations of tobacco product manufacturers. After the period of the greatest expansion of the illicit market in 2010-2015, when it reached as much as 19% of the size of the legal market, this value fell in 2019 to about 9.9%, but even so it was estimated at PLN 3.31 billion in market value and it was responsible for PLN 2.65 billion in lost budget revenues. Among the numerous proposed instruments to fight the illicit market, the most effective seem to be: a rational and predictable excise policy; tightening and effectively imposing fines; further improvement in the efficiency of law enforcement; and coordination among the various services.

• The greatest challenges facing the tobacco sector remain, aside from a possible decline in demand, the costs of compliance with domestic and EU law, and regulatory uncertainty, which includes the growth in number of laws enacted in recent years. From the sector’s perspective, changes in excise tax are particularly important, as are successive EU regulations. To maintain the sector’s development and investment potential, regulatory changes should be introduced in a clear and predictable manner, ideally for the long term.

• Simulations we conducted using a general equilibrium model indicate a significant influence of potential future changes in the tobacco sector on the entire Polish economy. In particular, the scenarios for the sector in which export demand increases, and investments and productivity grow, point to significant growth in the main macroeconomic variables, including GDP as a whole, wages and household consumption (for example, growth in foreign demand for Polish tobacco products by 10% would bring GDP growth of about PLN 1.2 billion). The opposite effect would be brought by the scenarios of decline in export demand, a halt to investment activity, growth in excise tax or compliance costs (in this final scenario, if production costs grow by 10%, Polish GDP would fall by PLN 1.4 billion).