Illicit trade thrives as South Africa bans alcohol and tobacco sales

As the taverns and drinking spots filled up with revellers in Xhora Mouth, deep in South Africa’s rural Eastern Cape, Lynne Wilkinson worried that the crowds celebrating Christmas would bring a new wave of coronavirus infection to an isolated region with few hospitals and clinics.

Bulungula Incubator, a charity where Wilkinson is acting director, had worked with villagers to manage the risk of big indoor gatherings. But tavern patrons at holiday time were much harder to convince.

That was until President Cyril Ramaphosa imposed a ban on all alcohol sales as the second wave of the pandemic rolled in. It was the third of four such bans in South Africa in the past year, all aimed at clearing hospital beds of wounded drunks to make coronavirus treatment easier — as well as to limit incentives for big gatherings.

The effect was immediate even with Xhora Mouth’s relative isolation. “It was almost as if you pulled a control switch,” Wilkinson says. “Because it’s so impossible to manage the taverns . . . that made a big difference.”

South Africa has been unusual during the pandemic in that it placed bans on sales of not only alcohol but also tobacco, in order to prepare hospitals for surges in Covid cases. The latest alcohol ban, targeting sales for off-site consumption, came as recently as Easter.

That has made South Africa a study in how illicit markets have responded to lockdowns.

Legitimate drinks and tobacco players took an instant economic hit as their customers turned to illegal supplies. “We have had three bans totalling 19 weeks of lost trade days, with R36bn ($2.5bn) loss in sales revenue for the industry and R29bn loss in tax revenue for government since the start of the lockdown this time last year,” says Sibani Mngadi, chair of the South African Liquor Brand owners Association.

But, based on survey data, the organisation estimates that 15 per cent of South Africa’s alcohol market is illicit or run by organised crime, amounting to an annual loss of R6.4bn for the state.

As South Africa’s first two periods of lockdown prohibition came to overlap with the gradual reopening of social gatherings and other parts of the economy last year, the lines between lawful and illicit trade swiftly blurred.

Some restaurants sold red and white “tea” under the counter. Suburbanites were referred via “friends of friends” to WhatsApp groups that arranged deliveries for a mark-up.

This affected one of the globe’s most intensive drink markets. South Africa ranks sixth in the world by alcohol consumed per drinker, according to data from the World Health Organisation, yet only a third of adult South Africans are drinkers.

Such a statistic comes with high rates of violence and drink-driving, underlining the bans’ purpose of protecting hospital capacity.

However, while 44,000 South Africans die a year from smoking-related diseases, there appeared less justification for the tobacco sales ban — and the long-term effects of illicit trade may prove even greater than that for alcohol.

“Nobody expected the ban to go on for 20 weeks,” says Corné van Walbeek, a professor at the University of Cape Town and an expert on the economics of tobacco control. “It became a farce. Everybody knew that people were buying illicitly.”

Before the sales ban, multinational groups such as British American Tobacco had a market share of about three quarters. This collapsed to as low as a fifth by the time prohibition ended in June and is now only two-thirds, according to estimates by van Walbeek and other researchers.

Nobody expected the tobacco ban to go on for 20 weeks. It became a farce. Everybody knew that people were buying illicitly

South Africa is not alone in facing the problem of illegal tobacco. A 2018 Euromonitor report concluded that 7.8 per cent of the global cigarette market was illicit and that this cost governments about $40bn in lost tax revenue.

Even before the pandemic, the extent of this trade was a threat to both the South African public purse and to law and order, with analysts noting that there was a history of official corruption over cigarette smuggling. While South Africa has an R20 tax per packet, with a diamond stamp to show that duty has been paid, prices below this are not uncommon.

The South African industry is also divided on how to bring about reform, with multinational cigarette producers and independent makers pulling in different directions.

The issue is bound up in South Africa’s biggest post-apartheid scandal, which is currently the subject of a judicial inquiry.

It is investigating claims that institutions such as the revenue service were hollowed out by Jacob Zuma, the former president, and his African National Congress allies — in order to enable systematic corruption, or so-called state capture. Zuma denies any wrongdoing.

“The cigarettes industry, in particular . . . has always been a problem,” Johann van Loggerenberg, author of Tobacco Wars and a former revenue official, said this month. “The government has been losing a lot of money and those legitimate businesses have suffered also.”

He told the inquiry that a special tax unit dedicated to combating illicit tobacco was hampered under Zuma.

When the pandemic struck, a difficult rebuilding of the revenue service under President Cyril Ramaphosa was still under way, which included a revived unit to fight the illicit economy.

That economy now places an even bigger strain on its resources. The revenue service is also yet to set up a proposed system to track the cigarette supply chain.

It has important consequences for the country’s public finances. The latest National Treasury forecasts indicate that it expects to collect taxes on 700m packs this fiscal year, down by nearly a fifth in two years.

While lockdown quitters may account for some of the drop, van Walbeek said it must include a substantial loss of trade to the illicit market: “The problem has become significantly worse.”