The effects of illicit cigarette trade in South Africa: a CGE analysis

Aim/purpose – This paper evaluates the effects of the illicit cigarette trade on the South African economy through a static Computable General Equilibrium (CGE) model. Indeed, the illicit cigarette trade occupies a prominent place in public debate in South Africa. Design/methodology/approach – The base year Social Accounting Matrix (SAM) of the model is constructed from the data for 2015 to reflect the most recent information. The model includes a number of direct and indirect tax variables. The indirect tax section is decomposed into VAT, excise and fuel levy for analysis purposes. The household section considered all income categories with 14 distinct deciles. Findings – One policy simulation was carried out to evaluate the effect of the illicit cigarette trade on growth and income distribution. Our findings show that the loss of R8 billion in tax revenue given the current growth of the illicit cigarette market has impacted negatively on the country’s GDP and employment rate. Research implications/limitations – We utilised the latest available data for 2015 when constructing the SAM that was used as database for the model. The assessment of the illicit cigarette trade through the application of a CGE model provided strategies for the implementation of a specific Cigarette Governing Body, with distinct areas of accountability focusing solely on illicit cigarettes. Originality/value/contribution – There is a need for urgent attention from the state to combat the trade in illicit cigarettes, as most of this illegal product is produced in South Africa. This paper contributes by expanding awareness amongst policy makers and the public regarding the connection between the illicit trade in licit goods, corruption, and organised criminal networks.