Illicit cigarettes tighten their grip as Treasury warns of deepening economic damage

Illicit cigarettes tighten their grip as Treasury warns of deepening economic damage

The warning signs have been there for years, but Finance Minister Enoch Godongwana says South Africa can no longer afford to look the other way. The illicit cigarette trade, he cautioned this week, is fast becoming a serious economic threat draining state revenue, costing jobs and weakening confidence in the country’s ability to enforce its own laws.

Godongwana’s comments come at a sensitive moment, as South Africa works to attract investors and stabilise its public finances in a tough global environment.

Factory closure puts jobs in the spotlight

The issue gained fresh urgency after British American Tobacco South Africa (BATSA) announced it would close its Heidelberg factory in Gauteng. The decision follows years of falling sales, driven largely by the explosive growth of the illegal cigarette market.

At least 230 jobs are now at risk, with knock-on effects for workers’ families and the surrounding community. On social media, the closure has reignited anger over illegal cigarettes, with many users asking how criminal networks have been allowed to dominate a sector once seen as a reliable source of tax income.

Industry estimates suggest that illicit products now make up about three out of every four cigarettes sold in South Africa a staggering shift that has reshaped the entire tobacco market.

‘Undermining our economy’

Speaking at the South Africa Night Reception during the World Economic Forum (WEF) Annual Meeting in Davos, Godongwana did not mince his words.

He acknowledged that illicit trade is having a “negative impact” on the economy and said the issue has been raised sharply within government, including during recent budget discussions led by Trade, Industry and Competition Minister Parks Tau.

More significantly, Godongwana revealed that government has agreed to develop a coordinated, government-wide intervention to tackle illicit trade, with an announcement expected within the next two weeks.

For Treasury, this is no longer just a policing issue it is a structural economic problem.

Why legal cigarettes are losing the fight

At the heart of the problem is price. Excise duty and VAT add R26.22 in tax to every legal pack of cigarettes. By the time products reach formal retailers, prices can climb to around R75 a pack far beyond what many consumers are willing or able to pay.

Illicit cigarettes, sold cheaply and often openly, fill that gap. The result is shrinking volumes for legal manufacturers, wholesalers and the transport companies that depend on them, while criminal syndicates pocket the profits and the state loses billions in revenue.

A broader fiscal risk

Godongwana has made it clear that the damage goes beyond the tobacco industry. Untaxed cigarettes distort pricing, weaken compliance and erode trust in regulatory institutions. Every rand lost to the illicit market is a rand not available for public services, infrastructure or debt reduction.

This pressure comes as South Africa faces wider global uncertainty. Godongwana has already warned that geopolitical tensions and the risk of a trade war could slow global growth, leaving less room to absorb domestic revenue losses.

Budget pressure builds

All eyes will now turn to the National Budget for the 2026/27 fiscal year, which Godongwana is due to table on 25 February. With fiscal space already tight, the growing illicit cigarette trade is shaping up as a critical test of government’s ability to protect revenue and enforce the rule of law.

As South Africa continues to sell itself to the world as an investment destination, Treasury’s message is becoming sharper: the country is open for business, but it is also gearing up to confront an underground economy that is quietly bleeding it dry.

{Source: IOL}

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