Price hikes a kick in butt for cigarette smokers

JAKARTA (JP): The increase in cigarette prices by up to 120 percent this week might significantly reduce cigarette producers' sales this year, analysts said yesterday.

The analysts said that the decline in sales would hit producers of both clove-blended and non-clove cigarettes, which were mostly imported.

Chandra Pasaribu, a tobacco analyst with Pentasena Securities, said the drop in sales volume would also be caused by the fall in consumers' purchasing power.

He said the fall in the rupiah against the U.S. dollar by 70 percent since early July had forced many companies to close, leaving millions of workers unemployed. Many companies have also cut salaries to stay alive, while prices of essential goods have increased by between 100 percent and 300 percent due to the sharp depreciation of the rupiah.

Eddy Widjoyo, an analyst with Mashill Jaya Securities shared Chandra's view, saying that the rupiah's sharp depreciation against the U.S. dollar would cause the purchasing power of middle and low-income people to decline sharply.

The Ministry of Finance announced early this week increases in the retail price of all types of cigarettes from 60 percent to 120 percent.

The decree called for an increase in the price of machine- rolled clove-blended cigarettes produced by companies with a production capacity of five billion cigarettes per year to Rp 175 (1.7 U.S. cents) per cigarette in 1998 from Rp 95 last year.

The decree said that the retail price of the cigarettes produced by companies producing between 2.5 billion and five billion cigarettes per annum would be raised to Rp 130 from Rp 70 per cigarette.

For those producing between one billion and 2.5 billion per year, the retail price was increased to Rp 120 from Rp 60 in 1997 and those producing less than one billion per year were allowed to raise the price to Rp 110 from Rp 60.

The decree also stipulated that the retail price per cigarette for hand-rolled clove-blended cigarettes by companies with a production capacity of more than five billion per annum was allowed to increase to Rp 120 from Rp 70 in 1997.

The decree also said that for companies producing between 2.5 billion and five billion cigarettes per year the retail price was raised to Rp 80 from Rp 50 previously; cigarette companies with a production of up to 2.5 billion per year were allowed to raise the retail price to Rp 60 from Rp 40; and for companies producing only 15 million per year, the retail price was increased to Rp 60 from Rp 30 in 1997.

Most securities analysts said the government's decision to raise the retail price was understandable to meet the tax revenue target of Rp 6 trillion in the 1998/1999 fiscal year which ends in March 1999.

"I think the government has to raise the retail price of cigarettes to offset a decline in revenue in other sectors this fiscal year," Chandra said.

The excise tax for cigarettes ranges from 2 percent to 36 percent depending on the size of each cigarette manufacturer's production. The cigarette companies which produce above five billion cigarettes a year have to pay an excise tax of 35 percent of the retail price. Small-scale cigarettemakers, producing less than 150 million cigarettes a year, pay 2 percent excise tax.

The analysts said, however, that retail price increases would also cause most consumers to change their smoking habits as they could not afford to buy the expensive cigarettes they used to smoke.

"Most consumers in Indonesia are more price-oriented than taste-oriented," Chandra said.

Most analysts said yesterday that most cigarette companies were now calculating their price adjustments and the consumers would only know the new prices next month. (aly)