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Illicit economy is eroding legitimate economy, Mavuso warns
Illicit economy is eroding legitimate economy, Mavuso warns
The illicit economy is killing jobs, Business Leadership South Africa (BLSA) CEO Busisiwe Mavuso has said, citing the recent announcement by British American Tobacco (BAT) that it will shut its only cigarette factory in South Africa this year as demonstrative of how policy failures and enforcement gaps are destroying legitimate manufacturing.
The cigarette company noted last week that its factory has been operating at 35% capacity and can no longer sustain operations. As a result, 230 direct jobs will be lost, but Mavuso believed the ripple effects could affect as many as 35 000 jobs across the value chain, from the 100 tobacco farmers in Limpopo, North West and Mpumalanga, who produced more than seven-million kilograms of tobacco last year, through to distributors and retailers.
"How did we reach this point? In 2019, illicit cigarettes represented roughly one-third of the market. Today, BAT estimates that proportion has more than doubled to 75%. The acceleration came from policy missteps during Covid-19, when legal cigarette and alcohol sales were banned (which was later declared unconstitutional) while enforcement capacity was diverted elsewhere, allowing illegal networks to establish distribution chains that never closed."
"Subsequent steep increases in excise duties on legal products created even wider price gaps that illicit operators exploited. Illegal boxes now sell for less than the R26.22 in combined excise and value-added tax that should be collected, circumventing health warnings and age restrictions, while costing the fiscus roughly R30-billion annually in lost tax revenue," Mavuso pointed out in her weekly newsletter on January 19.
However, she emphasised that it would be shortsighted to believe this was happening only in the cigarette market, noting that the same dynamics were destroying legitimate businesses across multiple sectors.
She pointed out that illicit alcohol sales had grown 55% by volume since 2017, with one in five drinks now coming from illegal sources, according to the Drinks Federation of South Africa.
Counterfeit pharmaceuticals, fake branded clothing, electronics, cosmetics and even food products are also flooding the market, Mavuso said. The Consumer Goods Council of South Africa has estimated the total illicit economy now represents about 10% of GDP.
"[This is] a staggering figure that, while difficult to measure precisely, indicates the massive scale of the problem," she said.
Mavuso posited that these illegal operations fed organised criminal networks involved in illegal mining, construction mafia activity, and other serious crimes, with the profits funding everything from cash-in-transit heists to more sophisticated criminal enterprises.
"Beyond the immediate tax losses and job destruction, the illicit economy undermines the rule of law and erodes public trust in institutions when criminals operate openly with apparent impunity," Mavuso said.
She said the South African business community had proposed concrete solutions.
For example, minimum retail pricing would make it harder for retailers to sell cigarettes below the tax threshold, while unique product marking systems – such as tamper-proof verification stickers on legal products – would allow for easy identification of authentic goods and help enforcement agencies target illegal imports and local production.
"Technology exists to enable consumers to verify product authenticity through smartphone apps, crowdsourcing enforcement. Yet these proposals have sat with government departments for years without implementation," Mavuso said.
She noted that BLSA had joined the Illicit Economy Task Force established by the Consumer Goods Council to drive coordinated action. The task force would develop specific proposals for product authentication systems across multiple sectors, create public awareness campaigns about the economic and safety risks of illicit goods and work directly with t...
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By PolityIllicit economy is eroding legitimate economy, Mavuso warns
The illicit economy is killing jobs, Business Leadership South Africa (BLSA) CEO Busisiwe Mavuso has said, citing the recent announcement by British American Tobacco (BAT) that it will shut its only cigarette factory in South Africa this year as demonstrative of how policy failures and enforcement gaps are destroying legitimate manufacturing.
The cigarette company noted last week that its factory has been operating at 35% capacity and can no longer sustain operations. As a result, 230 direct jobs will be lost, but Mavuso believed the ripple effects could affect as many as 35 000 jobs across the value chain, from the 100 tobacco farmers in Limpopo, North West and Mpumalanga, who produced more than seven-million kilograms of tobacco last year, through to distributors and retailers.
"How did we reach this point? In 2019, illicit cigarettes represented roughly one-third of the market. Today, BAT estimates that proportion has more than doubled to 75%. The acceleration came from policy missteps during Covid-19, when legal cigarette and alcohol sales were banned (which was later declared unconstitutional) while enforcement capacity was diverted elsewhere, allowing illegal networks to establish distribution chains that never closed."
"Subsequent steep increases in excise duties on legal products created even wider price gaps that illicit operators exploited. Illegal boxes now sell for less than the R26.22 in combined excise and value-added tax that should be collected, circumventing health warnings and age restrictions, while costing the fiscus roughly R30-billion annually in lost tax revenue," Mavuso pointed out in her weekly newsletter on January 19.
However, she emphasised that it would be shortsighted to believe this was happening only in the cigarette market, noting that the same dynamics were destroying legitimate businesses across multiple sectors.
She pointed out that illicit alcohol sales had grown 55% by volume since 2017, with one in five drinks now coming from illegal sources, according to the Drinks Federation of South Africa.
Counterfeit pharmaceuticals, fake branded clothing, electronics, cosmetics and even food products are also flooding the market, Mavuso said. The Consumer Goods Council of South Africa has estimated the total illicit economy now represents about 10% of GDP.
"[This is] a staggering figure that, while difficult to measure precisely, indicates the massive scale of the problem," she said.
Mavuso posited that these illegal operations fed organised criminal networks involved in illegal mining, construction mafia activity, and other serious crimes, with the profits funding everything from cash-in-transit heists to more sophisticated criminal enterprises.
"Beyond the immediate tax losses and job destruction, the illicit economy undermines the rule of law and erodes public trust in institutions when criminals operate openly with apparent impunity," Mavuso said.
She said the South African business community had proposed concrete solutions.
For example, minimum retail pricing would make it harder for retailers to sell cigarettes below the tax threshold, while unique product marking systems – such as tamper-proof verification stickers on legal products – would allow for easy identification of authentic goods and help enforcement agencies target illegal imports and local production.
"Technology exists to enable consumers to verify product authenticity through smartphone apps, crowdsourcing enforcement. Yet these proposals have sat with government departments for years without implementation," Mavuso said.
She noted that BLSA had joined the Illicit Economy Task Force established by the Consumer Goods Council to drive coordinated action. The task force would develop specific proposals for product authentication systems across multiple sectors, create public awareness campaigns about the economic and safety risks of illicit goods and work directly with t...