More than half of every cigarette smoked in Pakistan last year was illegal. These are not fake or low-quality cigarettes, but cigarettes that were never taxed or regulated. According to Oxford Economics, illicit cigarettes made up around 54% of Pakistan’s total cigarette market in FY2025. That means most of the market is operating completely outside the legal system. At this scale, this is no longer just a public health concern but also an economic one.
Billions Lost in Tax Revenue
The money being lost is hard to ignore. Between Rs274 billion and Rs343 billion in tax revenue was lost in FY2025 alone because of the illicit cigarette trade. That is money that could have gone towards reducing the country’s deficit or paying for public services. Instead, it is moving through a system that pays no tax, follows no rules, and faces almost no consequences.
Steady Growth of the Illicit Market
This has been building for a long time. The illicit market has been expanding steadily for a decade, having grown by around 28% since 2015. Legal manufacturers have been losing ground, not because people are smoking less, but because more of that demand is now being met by sellers who do not carry any of the costs that legal businesses do.
Taxation as a Driver
The biggest driver behind this is taxation. Every time tax rates go up, legal cigarettes become more expensive, and the price gap between legal and illegal products grows. Higher tobacco taxes do make sense in principle, as they are meant to discourage smoking and raise revenue. But when the increases are too large and too frequent, smokers opt for cheaper illegal alternatives. When inflation hit hard in FY2023 and people had less money to spend, the price difference became the deciding factor for a large portion of the market. As a result, the policy meant to reduce smoking ended up driving more people towards unregulated cigarettes.
Local Production and Enforcement Gaps
The problem is also more complicated than it appears on the surface. Most people assume illicit cigarettes are smuggled in from across the border. That does happen. But a large portion of illegal cigarettes in Pakistan are actually made here, in informal factories that produce at scale while staying off the radar. This matters because no amount of border security will fix the problem on its own. The supply chain runs from local production all the way to retail shelves.
Pakistan does have a system designed to address this: the Track and Trace System, which follows cigarettes from the factory to the point of sale. If implemented properly, it would make it much harder for illegal products to move through the market undetected. But it has not been applied consistently. Oversight of raw materials is weak, so informal manufacturers can source what they need without drawing attention. Penalties for breaking the rules exist but are rarely enforced. Operating illegally in this market carries very little real risk, and the people doing it are well aware of that.
A Solvable Problem
That is the heart of the problem. The illicit cigarette trade is not thriving because it is impossible to stop. It is thriving because the response has never targeted the whole chain at once. Cracking down at the border means little if production is happening locally. Monitoring factories means little if distribution goes unchecked. Every gap that remains open is a gap the illicit market will continue to exploit.
Oxford Economics is clear that this is a solvable problem. A more stable tax policy that avoids sudden, large increases would narrow the price gap that makes illegal cigarettes so appealing. Proper enforcement of the Track and Trace System would make it harder for illicit products to move freely. Tighter oversight of raw materials would make informal manufacturing harder to sustain. None of this requires building new systems from scratch. The tools are largely already there. What has been missing is the commitment to use all of them together, consistently, and without leaving gaps. Until that happens, the legal market will keep shrinking and the government will keep losing revenue, not because the problem cannot be solved, but because it has never been treated with the seriousness it deserves.
