Why Is State Protecting Some Cigarette Manufacturers? Mind the horns!

The government of Prime Minister Boyko Borisov decided to dramatically increase the employer’s social security benefits contributions in all sectors of the economy. However, the local cigarette manufacturing monopolies – Bulgartabac and KT International – remain privileged. They will be spared the increase because, according to Social Policies Minister Ivaylo Kalfin, the wages of their employees were falling. The wages are falling, but the profits of the two tobacco giants are growing, according to their accounting reports for the last year. This shows that the reasons for the low salaries are subjective, not objective.

The unprecedented act of State support is accompanied by the decision of Finance Minister Vladislav Goranov to change the excise duties on cigarettes, also in favor of the two darling companies of the government. All these actions of the Cabinet “Borisov 2” speak loudly and clearly that cigarette bosses will contribute far less money to the budget and the treasury, consequently that money will go in their pockets.

As the topic is of great public importance and as it rises questions that have their hidden answers Bivol approached financial expert Roumen Galabinov for an opinion.

Rumen Galabinov has a Master’s Degree in Economics. He has specialized in Georgetown University, Washington DC, USA (Bank Risk Management), Saint John’s University, College of Insurance and Risk Management, New York, USA, University of Exeter, UK (Banking and Finance). He has professional qualifications in insurance and risk management and securities markets from Germany and England. Mr Galabinov is a former Director General of the Insurance Supervision Agency and former Deputy Chairman of the Financial Supervision Commission of the Bulgarian Ministry of Finance. He is currently Regional Manager of the prestigious international company IUC. Mr Galabinov is the author of three books and a number of articles in Bulgarian press on insurance and finance.

The State benefits local cigarette manufacturers through excise taxes and lower social benefits contributions

The social security benefits contributions in all sectors of the Bulgarian economy will be increased with the exception of companies that are cigarette manufacturers.
Two-thirds of the employed in the sector work in two companies – Bulgartabac Holding and KT International (formerly King’s Tobacco), the latter associated with the owners of the manufacturer of alcoholic beverages Peshtera.
The minimum insurable income increases by 7.5% in 37 sectors of the economy for which employer’s associations and trade unions have not reached agreement on the amount of the increase or have not negotiated, and the chosen rate is the average achieved in bilateral negotiations in the remaining 48 activities.
However, unlike the usual practice so far, there is an exception for the cigarette industry, where the thresholds remains at this year’s level on the grounds that this was the only economic sector in which there was a decline in sales and wages.
At the same time revenues of Bulgartabac are growing, the market share is also growing, and the trend is valid for the other local producer KT International, while there are sectors in the economy for which the year is weak, but an exception is not provided for them.

With the changes in excise taxes, the State is also assisting local cigarette manufacturers at the expense of importers

The government changed the structure of the excise duty on cigarettes urgently and without public discussion to help domestic manufacturers Bulgartabac and KT International.
In reality, the changes will lead to a greater price increase of cigarettes in the high and middle price range and less of those of with lower prices, while namely those two companies produce the cheapest brands of cigarettes and changing the excise formula is a kind of “punishment” for foreign companies.
Major international cigarette companies fear that this gives market exclusivity to certain producers, rather than finding ways to deal with smuggling.
According to the State, the purpose of the change is to keep the price of cheap cigarettes low at the expense of the middle and high class cigarettes, thus this will be an attempt to reduce smuggling as people with low income tend to smoke cigarettes without excise labels.
Ultimately, however, the State gets more excise duty from the more expensive cigarettes in the middle and high price range, and most of the smoked cigarettes are in this range, thus it is strange that the government wants to promote only the cheapest products.

In this way, with excise and contribution changes, the State is allowing a commercial advantage for certain producers.

Do we have “crony capitalism” economy in Bulgaria?

In Bulgaria we have a typical “friendly” economy, or the so-called Crony Capitalism. The examples are numerous and outrageously indicative. That phenomenon is inevitably associated by global financial and economic actors with an alarmingly high index of corruption in a country. In this situation, success in business depends on close relationships between business people and government leaders.

It occurs in the distribution of government procurement as well as in the special excise tax and insurance incentives.
Business cronyism and selfish behavior extend to the economy and the governance of our country through corruption.
The greedy ties with the government influence the economy to such an extent that it leads to government decisions in favor of “friends” of our State leaders.
There is more direct government involvement in specific sectors of the economy, which remains generally uncompetitive.
Government watchdogs encourage the established “crony” interests by restricting the free market and competition.

*Prime Minister’s Reaction

After the publication of Mr Galabinov’s analysis, Bulgarian Prime Minister, Boyko Borisov, hastily declared all the way from Madrid that he was cancelling plans for preferential minimal insurable income for tobacco producers. He even bragged that he has scolded Ivaylo Kalfin, though he was unaware of the prepared long before change which benefits Bulgartabac. The reaction of the coalition partners of Borisov’s ruling Citizens for European Development of Bulgaria (GERDB) party regarding these preferential conditions was too revealing. Radan Kanev directly accused the executive of “lobbying exceptions for an entire sector and individual companies, which are under the permanent political protection of the party representing Bulgarian Muslims – Movement for Rights and Freedoms”. Borisov as always acted with the old tried and tested tactics to impose some lobbying laws and wait and see if it will fly. However, if there is resistance – he would nobly declare that he did not know and is personally intervening to stop the “outrage”. It remains to be seen after the end of the election campaign, whether Kalfin will withdraw the proposal or if it will be quietly left to be debated in committees in Parliament?

However, the Prime Minister did not mention the unprecedented excise duty preferences that Finance Minister Vladislav Goranov granted to Bulgartabac and King’s Tobacco. Goranov, himself, argued a month ago that this policy supported “the fight against smuggling”. This is a quite inappropriate explanation on the background of recent revelations of the Turkish financial intelligence MASAK incriminating Bulgartabac as the biggest cigarette smuggler in the Middle East.

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