IMF identifies high illegal cigarette trade as major issue for Ukrainian budget
For the first time in its report on Ukraine, the IMF mentioned the problem of the large illicit cigarette market (photo: Getty Images)
The International Monetary Fund (IMF), in its materials, based on the results of the 4th revision of the Extended Fund Facility program, for the first time mentions the challenges for the Ukrainian budget because of the large illicit cigarette market.
In its report, the IMF cites a study conducted by the consulting company Kantar Ukraine, which estimated the level of illicit cigarette trade in Ukraine at 22%.
Indicative calculations using publicly available data on imports of key components for cigarette production (acetate fiber and cigarette filters) also show the significant discrepancy between the production volumes mentioned in tax declarations and those supported by these imports.
"The presence of large-scale shadow cigarette production, which escapes excise taxation, implies a large revenue loss, with an estimated excise tax gap of 17–31 billion UAH. The overall tax gap could be larger if noncompliance with other taxes, especially VAT, were considered," the IMF report says.
The IMF mentioned that Ukraine now needs to restore fiscal and debt stability by conducting fiscal adjustments based on stable incomes.
The National Revenue Strategy stipulates, in general, the mobilization of domestic revenues and, in particular, bringing excise taxes on tobacco products in line with the minimum levels defined by EU directives.
Government bill №11090, stipulating the transfer of excise taxes on tobacco products from the Ukrainian national currency (hryvnia—UAH) into the euro and tax differentiation on cigarettes and tobacco products for electric heating, will help to achieve this goal. The bill was supported by the key business associations of Ukraine.
Also, by early 2026, the authorities should implement a system of tracking and controlling the circulation of excise goods following EU legislation.
Law №3173-IX was adopted in June 2023. Currently, work is underway on developing IT solutions to implement the tracking system for the circulation of excise goods and on drafting by-laws.
According to the estimates of the Ukrainian Ministry of Finance, this will allow increasing the income to the State budget of Ukraine by 0.6 billion UAH in 2025, 5 billion UAH in 2026, 9.4 billion UAH in 2027, and 13.9 billion UAH in 2028.
At the end of June 2024, the IMF Executive Board completed the 4th review of the program under the Extended Fund Facility (EFF) for Ukraine.
Ukraine will receive the next tranche of about 2.2 billion USD soon. Thus, the total amount of funds raised by Ukraine within the EFF will reach about 7.6 billion USD.
On March 31, 2023, the Executive Board of the IMF approved the four-year EFF program for Ukraine with overall financing of about 15.6 billion USD. This program is a part of the large package of international support for Ukraine, which currently amounts to about 122 billion USD.
