Indonesia, the world’s third-largest tobacco-consuming nation, is facing a sharp shift in its cigarette market dynamics. An economic slowdown, rising unemployment, and steep tobacco excise duties have fueled a surge in illicit cigarette consumption. This trend threatens both major tobacco producers and the country’s fiscal revenues.
Cigarettes Remain a Core Household Expense
The country is home to an estimated 66 million tobacco users aged 15 and above, according to the World Health Organization. Cigarettes are deeply ingrained in daily life, with clove-laced kretek cigarettes dominating the market. Yet even in this stronghold, legal cigarette sales are now faltering.
The shift is largely driven by affordability. Legal cigarettes, heavily taxed, now cost at least Rp2,000 ($0.12) per stick. In contrast, illegal cigarettes are available for as little as Rp600 — more than 60% cheaper. These illicit products evade excise taxes, which currently make up around 75% of the final retail price.
Low-Income Households Under Pressure
Indonesia’s middle- to low-income households, which are already under strain from deteriorating job conditions, are the primary drivers of this shift. Government data shows that tobacco products account for around 6% of monthly household spending — more than education. As incomes fall, this proportion becomes increasingly difficult to sustain.
The job market has played a critical role. A growing share of the population is working in the informal sector, which now accounts for 60% of total employment. These jobs offer lower wages and minimal security. The result is weakening household consumption across various sectors, from automobiles to food service.
Excise Policy: Intended Reform, Unintended Consequences
The cigarette industry’s decline began in 2020 when the government initiated a series of tax hikes to both boost revenue and reduce smoking rates. Over the last five years, tobacco excise duties have increased by 67.5%. While successful in curbing legal consumption, the policy has unintentionally expanded the black market.
Sales data from the country’s largest producers confirm the downward trend. Market leader Hanjaya Mandala Sampoerna, owned by Philip Morris, reported a 3.7% drop in total sales to 80.8 billion cigarettes in 2024. The first half of 2025 continued this trend with a further 1.5% decline. Gudang Garam, another key player, described the market environment as severely weakened.
State Revenue at Risk
The impact on government finances is significant. Tobacco excise taxes generated Rp216.9 trillion ($13 billion) in 2024, accounting for roughly 7.5% of state revenue. Analysts warn that every 10% drop in excise revenue could reduce overall fiscal revenue by 1%. In response, the finance ministry has decided to halt further tax increases on tobacco products in 2026 in an effort to curb illegal trade and stabilize legal sales.
To compensate, the government is reportedly exploring alternative revenue strategies that ensure long-term sustainability for the industry while addressing the public health impact of smoking.
Outlook Remains Uncertain
The outlook remains cautious. Industry players are reluctant to raise prices further, fearing an even greater shift toward illicit products. Without improvements in household purchasing power and stronger enforcement against black-market sales, Indonesia’s legal tobacco industry is expected to remain under pressure.
As the country navigates a fragile recovery, the case of its tobacco sector serves as a broader indicator of how informal economies and tax evasion can undercut both public health initiatives and national budgets — especially in times of economic stress.