Bosnia and Herzegovina Has Not Eliminated the Black Market in Tobacco: What Do International Experiences Show?

Although the black market for cigarettes in Bosnia and Herzegovina is declining, the problem persists, not only in the country but also globally, as demonstrated by a new report from Oxford Economics.

Recent IPSOS research, it should be recalled, shows a significant decline in the illicit market for tobacco products in Bosnia and Herzegovina. The share of untaxed tobacco products in total consumption fell from 33 per cent in 2025 to 26 per cent in 2026, representing a decrease of 21 per cent.

The Problem Remains Significant

Although this is a positive trend and a result of increased enforcement activities by the relevant authorities, the illicit market still accounts for more than a quarter of total tobacco product consumption in Bosnia and Herzegovina, indicating that the problem remains substantial.

The research shows that illicit cigarettes account for around three per cent of total cigarette consumption, a slight decrease compared with last year, when their share stood at four per cent. Illegal cigarettes found on the Bosnian and Herzegovinian market generally lack a tax stamp or carry a tax stamp from another country, most commonly from countries in the region. Markets remain the main sales channel, but sales also take place through alternative channels, including informal networks, individual sellers, online shops, social media and digital platforms.

How Much Is Bosnia and Herzegovina Losing?

The IPSOS research shows that open-air markets remain the most common place to purchase illicit tobacco products, particularly cut tobacco. Although online sales through social media and digital platforms grew significantly during the COVID-19 pandemic, traditional sales channels continue to dominate the illicit market.

Bosnia and Herzegovina is estimated to lose around BAM 419 million annually in excise duty and VAT revenue as a result of the black market in tobacco and tobacco products.

However, illicit trade is not a problem unique to Bosnia and Herzegovina. Around 13 per cent of cigarettes consumed worldwide originate from illicit sources. This amounts to approximately 370 billion illicit cigarettes annually, or around 50 cigarettes for every person on the planet. Estimated annual tax revenue losses range from EUR 47 billion to EUR 59 billion, equivalent to approximately BAM 92 billion to BAM 115 billion.

Oxford Economics, a firm specialising in economic analysis and assessments of economic and social impacts, published a report in September 2026 entitled An Economic Assessment of the Drivers of Illicit Trade.

The study specifically examines illicit cigarette trading and analyses the experiences of nine markets—Australia, Bangladesh, Brazil, Chile, France, Malaysia, the Netherlands, Pakistan and Ukraine—to determine which economic, institutional and market factors contribute to the growth of illicit trade.

What Does the Analysis Show?

The analysis shows that illicit trade is driven not by a single factor but by a combination of economic incentives for criminal networks, demand for cheaper products, institutional effectiveness, organised crime, corruption, geography and social norms. Nevertheless, the economic incentive is particularly strong.

In the nine countries analysed, taxes accounted for an average of around 77 per cent of the retail price of legal cigarettes. Legal cigarettes were between 1.5 and 3.5 times more expensive than illicit cigarettes. Between 2015 and 2025, the average share of the illicit market in the countries analysed increased by 23 percentage points, from 18 per cent to 43 per cent. The analysis also found that estimated tax revenue losses due to illicit trade in 2025 averaged 85 per cent of the actual tax revenue collected from cigarettes.

What Happens When Legal Cigarettes Become More Expensive?

The report specifically warns that once an illicit market becomes established, criminal networks and distribution channels become deeply entrenched, making them considerably more difficult and costly to dismantle later.

One important finding is that an increase in the price of legal cigarettes does not necessarily lead to a proportional reduction in overall consumption. In all seven countries analysed where the real price of legal cigarettes increased, the volume of illicit cigarette consumption also rose.

Oxford Economics identified a strong correlation between rising legal cigarette prices and the growth of the illicit market. The average correlation between the real prices of legal cigarettes and the share of the illicit market across the nine countries analysed was 78 per cent. Correlation alone does not establish a cause-and-effect relationship, but the consistency of the results across different markets indicates that price is an important part of the explanation.

The Importance of Tax Stability

The experiences of Brazil and Malaysia are particularly interesting. Following periods of substantial excise duty increases and growth in the illicit market, extended periods of stable excise duties were associated with a reduction in the illicit market's share. Oxford Economics therefore highlights the importance of tax stability and avoiding sudden tax increases.

At the same time, the report emphasises that taxes and prices are not the only factors. The scale of the black market also depends on the strength of organised criminal networks, the effectiveness of law enforcement institutions and agencies, corruption, geographical location and social tolerance towards the purchase of illicit products.

The underlying economic model is straightforward: the greater the price difference between a legal product, which includes excise duties and other taxes, and an illicit product on which no taxes are paid, the greater the potential profit for criminal networks.

Oxford Economics therefore assesses the size of the illicit market by examining the relationship between potential profits, the risk of offenders being detected and punished, and local supply and demand conditions. In other words, a high tax burden and a substantial price gap can create a strong financial incentive, but whether that incentive develops into a large illicit market depends on how easy it is to manufacture, smuggle and sell illicit products, as well as the actual risks faced by those involved.

Penalties Alone Are Not Enough

For this reason, Oxford Economics concludes that law enforcement and appropriate penalties are necessary but insufficient on their own. Preventing illicit supply chains from developing is far more effective than attempting to dismantle them after they have become entrenched. The report states that once an illicit market becomes firmly established, it can take up to eight years of intensive measures to bring it back to the level recorded before a major tax increase. This underlines the case for preventive action rather than a reactive approach.

The examples of France and the Netherlands illustrate what happens when the price gap widens significantly.

In France, for example, 54 per cent of all cigarettes consumed in 2025 had not been subject to domestic excise duty. Excise duty and VAT accounted for 83 per cent of the price of a legal cigarette pack, while cigarettes from illicit sources cost around 49 per cent of the price of legal cigarettes. Between 2015 and 2025, increases in excise duty and VAT accounted for 88 per cent of the real increase in the price of legal cigarettes. Estimated tax revenue losses reached EUR 14.5 billion in 2025.

The conclusion, therefore, is that the French market is characterised by a high tax burden, a substantial price gap between legal and illicit products, and a sharp increase in the consumption of cigarettes on which domestic excise duty has not been paid.

In the Netherlands, the share of cigarettes on which domestic excise duty had not been paid increased from six per cent in 2015 to 45 per cent in 2025. During the same period, excise duty on cigarettes rose by 60 per cent in real terms, while excise duty and VAT accounted for 83 per cent of the price of legal cigarettes in 2025. Cigarettes on which domestic excise duty had not been paid cost around 28 per cent of the price of legal cigarettes, and estimated tax revenue losses amounted to approximately EUR 2.2 billion.

This suggests that the Dutch market is characterised by a sharp increase in the tax burden, high consumer sensitivity to prices and the rapid expansion of consumption of cigarettes on which domestic excise duty has not been paid.