BELGIUM: Smuggling of Cigarettes in the Balance of Payments

Introduction

Smuggled tobacco is added to the goods account of the balance of payments, more specifically to the general merchandise on a balance of payments basis. In 2017, it accounted for 0,01% of total goods imports and 0,03% of total goods exports.

Scope, Methodology, Compilation Practices, and Data Sources

The estimate of smuggling in Belgium is confined to tobacco products, particularly cigarette smuggling. Since cigars represent a very small share of total household consumption expenditure, at only 3 to 5 % of the tobacco products consumed, the level of cigar smuggling is considered negligible. That assumption is borne out by the lack of cigar seizures and the declining popularity of cigars as the years go by. The approach used is demand-side oriented.

There is very little to no information on the illicit consumption or trade of cigarettes, implying that several hypotheses were necessary. Consumption of smuggled cigarettes is estimated using a price times quantity approach. Street prices are set at half the official price. Quantities are equal to a proportion of the legally sold quantities (based on information of FPS Finance), which was equal to 6.5 % in 2012. This share of illegal consumption is analyzed yearly based on information available.

The production of illicit cigarettes is set at zero. Only trade margins are produced and calculated based on price differences between imports, exports and consumption. Intermediate consumption is set at 10 % of the produced trade margins. To avoid double-counting, it is assumed that this expenditure was already included in final consumption expenditure estimates for transport.

(COICOP 07) and needs to be deducted. As stocks would increase the risk of being caught, we consider them to be negligible and set them to zero.

Imports and exports are estimated based on a price times quantity approach combining seizure data with hypotheses on the risk of being caught, transit rates and market values.

For imports, seized quantities are extrapolated using a risk rate, which was set at 10 % in 2012. A five-year moving average is applied to avoid fluctuations that reflect changes in seizure patterns rather than changes in smuggling. Transit is excluded from the estimates. As Belgium is historically considered to be an important transit country for smuggled goods, the transit rate is set high, at 65 % of all smuggled exports in 2012. Prices are set at 10 % of the street value (which are set at 50 % of official prices) in 2012.

For exports, total quantities are estimated as the difference between imported quantities (incl. transit) and consumed quantities. Total exported quantities allow us then to estimate quantities that are immediately re-exported (transit) after importation (65 % of total exports) and exclude these from the estimates. The export price is calculated based on the price differences with the main country of destination and set at 60 % of the official price in 2012.

Linkages Across Statistical Domains

Estimates are introduced in a harmonized way in both balance of payment and national accounts.

Current Challenges and Conclusions

Challenges in estimating the illegal economy are mostly due to the lack of source data and the need to set hypotheses.

Annexes

A detailed description of the methodology used can be found here.