Abstract:

Various aspects of tobacco have been examined through different studies. However, input demand and supply response of tobacco at the barn level remainsremains unknown. This study examines profitability, input demand, and supply response of tobacco in Khyber Pakhtunkhwa by employing a normalized restricted translog profit function. The findings indicate that tobacco production is profitable, and barn owners in the province are responsive to changes in output and input market prices. The use of labour and fuelwood in the processing of green leaves is very important in resource allocation decisions. The demand for labour and fuelwood increases as the price of tobacco output rises at the barn level. Furthermore, higher input prices have a negative effect on the province's tobacco supply. This study suggests that the government should seek an alternative to fuelwood that would not only help in reducing costs but also be beneficial to the environment and prevent deforestation.

Key Words:

Tobacco barn; Supply Response, Translog profit function, Khyber Pakhtunkhwa

Introduction

Tobacco production and its related industries are undeniably important to Pakistan's economy (PARC, 2012). Pakistan, one of the world's top ten countries for producing raw tobacco, was placed ninth in 2018 (FAOSTAT, 2020). The crop's most distinguishing feature is its linkage to the viable and efficient cigarette industry. Regardless of the fact that tobacco is only cultivated on about 0.25 per cent of total irrigated land, the crop contributes significantly to the country's economy by creating jobs and generating revenue from tobacco production and its related industries (National Bank of Pakistan, 2018; 2020). Despite being among the top producers of tobacco, the country's tobacco crops remain relatively small in terms of cultivated land and production value, accounting for only about 0.42 per cent of the total value of agricultural products. The area of land allocated for tobacco growing has not exceeded, over the past 20 years, more than 0.25 per cent of the total arable land (Saleem and Iqbal, 2020). The cigarette industry also does not contribute significantly to the manufacturing sector or GDP of the country. The importance of the tobacco industry in Pakistan may be evidenced by the fact that this sector contributes 2.2 per cent of the large-scale manufacturing sector as well as 0.5 per cent of the country's industrial employment. Furthermore, this sector contributes roughly 4 per cent of the federal government's indirect tax revenue, largely collected through federal excise duties (SPDC, 2018). The tobacco industry in Pakistan supports 1.2 million people's livelihoods, directly and indirectly, employs 350,000 people, and generates around Rs. 300 billion in annual revenue (Daily DAWN, 2016; Ali, 2020; PTB Website). 

Many tobacco-producing countries in Africa and Asia are low-income, exporting the majority of their tobacco while consuming less than 20 per cent of it domestically. Among the developing countries that cultivate tobacco, India, Pakistan, Malawi, and Zimbabwe are the countries that are considered low-income food-deficit countries (LIFDCs) (Zafeiridou et al., 2018). Figure 1 of the study depicts the top ten tobacco producers in the world, with China leading the pack with an estimated annual production of 2241 thousand tonnes in 2018 (about 36.77 per cent of global annual tobacco production). After China, the other major producers of raw tobacco were Brazil, India, and the United States, which produced 762.27, 749.91, and 241.87 thousand tonnes, respectively. Brazil, the world's second-largest tobacco producer, produced 12.50 per cent of total tobacco, followed by India and the United States, which produced 12.30 and 3.97 per cent of total annual tobacco production, respectively. In 2018, Pakistan produced 106.73 thousand tonnes of raw tobacco, ranking ninth in the world and accounting for 1.75 per cent of global output (FAOSTAT, 2020).

Tobacco was not grown in Pakistan at the time of independence, so in order to meet the country's tobacco demand, the government imported tobacco (Ali et al., 2015). In 1948, Pakistan departed from being fully dependent on tobacco imports and achieved self-sufficiency in tobacco production in 1969 (Majid et al., 2017). Before 1968, the cultivated tobacco in the country was not up to the standard; thus, the government spent valuable foreign exchange reserves to import high-quality raw tobacco to meet the industry's demands (Ali et al., 2015). The federal government of Pakistan started considerable measures to help develop and improve the country's tobacco sector in 1968. In order to achieve these goals, the Pakistan Tobacco Board (PTB) was established in 1968 to promote and increase tobacco production as well as tobacco exports from the country. Since its inception in 1968, the PTB has worked to defend the rights of tobacco producers, purchasers, tobacco product manufacturers, and tobacco processing dealers. The quality and quantity of tobacco match the world's leading tobacco-growing countries due to PTB research and development activities in the country (Ali et al., 2015).

As shown in table 1, the average level of production of raw tobacco was slightly higher than 100 thousand tonnes during the period 2000-01 to 2017-18. The highest output of raw tobacco in the country (129.8 thousand tonnes) was reported in 2013-14, followed by a decreasing trend in production up to 2017-18. Likewise, the production of raw tobacco in KP was the maximum in the same year 2013-14 (100.8 thousand tonnes), and there was a decreasing pattern up to 2018. The declining trend in production can be attributed in part to the shrinking cultivation area. In 2009-10, the KP's share of total production was the highest, accounting for 78.88 per cent of total raw tobacco produced in the country. Tobacco exports and their products are earning valuable foreign exchange for the government. In 2000-01, 3.21 million kilograms of raw tobacco (unmanufactured tobacco) were exported to various countries of the world, and in the same year, 84.19 million cigarette sticks and 3.86 million cigar sticks were also exported, earning 284.41 million rupees. Tobacco and its products were exported in 2017-18 for a total of $25.75 million. In 2017-18, Phillip Morris (Pak) was Pakistan's largest exporter of raw tobacco, while Pak Hills Company became the second-largest exporter of tobacco (Pakistan Tobacco Board, 2019).

Table 1. Share of Khyber Pakhtunkhwa in Cultivated Area and Tobacco Production in Pakistan