“We decided to increase the cigarette excise by 23 percent on average, while the retail price will be hiked by 35 percent. This will be regulated in a Finance Ministry regulation,” said Finance Minister Sri Mulyani Indrawati at the State Palace on Friday.

She added that President Joko “Jokowi’ Widodo and Vice President Jusuf Kalla had given their blessings to the decision, which was also taken in consultation with the Office of the Coordinating Economic Minister, the Manpower Ministry, the Industry Ministry and the Agriculture Ministry.

The move marked the government’s reversal of its decision to leave the cigarette excise unchanged in 2019 — the first time since Jokowi assumed office in 2014. The cigarette excise was increased by 10.04 percent in 2018, 10.5 percent in 2017, 11.3 percent in 2016 and 8.7 percent in 2015, according to Statistics Indonesia (BPS).

Sri Mulyani said the government’s excise policy was taken in accordance with a variety of factors, namely the efforts to reduce the smoking prevalence, to allow revenue management for the tobacco industry as well as to raise state revenue.

“From the consumption side, the rising prevalence of smoking, particularly among women and children, has come to our attention,” said the former World Bank managing director. “We have to pay attention to how to use excise policy to reduce the rising trend in cigarette consumption.”

The 2018 Basic Health Survey (Riskesdas) conducted by the Health Ministry revealed that smoking prevalence among children aged between 10 and 18 years increased to 9.1 percent last year, compared to 7.1 percent recorded in previous research in 2013.

Smoking prevalence among women was recorded at 4.8 percent in 2018, lower than the 6.7 percent in 2013. The 2018 figure, however, was worse compared with the 2016 national health indicator survey, which reveals that smoking prevalence was previously as low as 2.5 percent.

On the other hand, if the government increases the cigarette excise too steeply, it could boost the production of illegal cigarettes, which are not subject to the excise, said head of the Indonesian Tobacco Society Alliance’s (AMTI) media center, Hananto Wibisono.

“The fact is that a drastic excise hike will stimulate the growth of illegal cigarettes, which would hit legal cigarette makers, their workers and farmers and eventually the government itself,” said Hananto, arguing that a cigarette excise hike that deviated too far from the inflation and economic growth figures would severely impact the labor-intensive industry.

Sri Mulyani acknowledged this possibility but she also said the customs and excise authority had been able to reduce the distribution of illegal cigarettes to around 3 percent of the total cigarettes sold in the market.

Cigarette excise accounts for the lion’s share of total excise revenue. In the draft of the 2020 budget, excise from tobacco products was expected to bring in Rp 171.9 trillion (US$12.32 billion) or 95.9 percent of the total excise revenue target. As of July, the government had already collected Rp 79.15 trillion in excise revenue.

Shares of publicly listed cigarette companies, which weigh heavily on the Jakarta Composite Index (JCI), responded differently to the news. Shares of PT Gudang Garam were up 0.77 percent at the close of trading on Friday while shares of PT HM Sampoerna and PT Bentoel Internasional Investama dropped by 0.71 percent and 2.86 percent, respectively.

The JCI, the main gauge of the Indonesia Stock Exchange (IDX), declined by 0.12 percent to 6,334.84 on Friday.

“Sampoerna has not yet seen the details of the proposed excise regulation, however, the announced increase is unexpected and will definitely disrupt the tobacco ecosystem,” the company’s director, Troy Modlin, said in a statement.

“If the government intends to implement an excise policy that can support continued industry employment, we suggest that existing tax loopholes for machine-made products are immediately closed and the current production thresholds for hand-rolled products remain unchanged,” he added. “This would achieve the government’s objectives while providing a level playing field for industry players.”

BNI Sekuritas equity analyst William Siregar told The Jakarta Post on Friday that the rise in tobacco excise and retail prices could potentially put pressure on tobacco and cigarette makers’ performances as it would reduce their sales volumes.

Right after Jokowi took office for his first term, the government increased tobacco excise by 24 percent in 2015. Such an increase, William said, did reduce cigarette volumes by 2.8 percent but the companies’ revenues continued to increase.

“Cigarettes are a staple for many Indonesians, […] as long as the government can maintain purchasing power in 2020, the tobacco industry will survive,” he said via a text message, adding that the impact of the excise hike would only last for a short term.

He projected that cigarette sales volume would decrease by 2.5 percent to 3 percent next year.

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