Cigarette Affordability and Consumption in Bosnia and Herzegovina, 2010-2023: Implications for Tobacco Tax Policy.

Abstract

Background: Tobacco taxation effectively reduces cigarette consumption, but its success depends on whether price increases outpace income growth. In Bosnia and Herzegovina, rising incomes and stagnating excise taxes after 2019 have increased cigarette affordability.

Methods: Using quarterly data from 2010 to 2023, an error correction model estimated with instrumental variables exploiting policy-driven variation in tobacco excise taxes was applied to estimate (1) separate price and income elasticities and (2) affordability elasticity using the relative income price. The affordability-framework restriction (that price and income elasticities are equal in magnitude) was also tested, and policy simulations were conducted to estimate the tax increases needed to reduce consumption by 10%.

Results: Long-run price, income, and affordability elasticities were -0.965 ($p<0.001$), 0.752 ($p<0.001$), and -1.065 ($p<0.001$), respectively. The restriction of equal price and income effects was not rejected in the baseline model ($p=0.231$), but was rejected when controlling for a 2016 advertising ban ($p=0.019$). To achieve a 10% reduction in consumption under 1.37% annual income growth, required price increases were 11.43% (unrestricted model) versus 10.76% (affordability model), requiring specific excise tax increases of 40.83% and 33.53%, and raising excise revenues by 31.48% and 23.53%.

Conclusions: Affordability elasticity provides a practical basis for policy, but should complement-rather than replace-unrestricted price-income models. Policymakers should implement substantial excise hikes and index tax adjustments to inflation and income growth to sustainably curb consumption.