Shadow Economy in Lithuania: A Boost in Illegal Alcohol and Tobacco

Georgie Pauwels via flickr || Creative Commons

After three years of decline, illegal trade in alcohol is on the increase, shows a research by the Lithuanian Free Market Institute (LFMI). According to LFMI, this year the shadow economy occupied 24% of the spirits market in Lithuania, representing an increase by two-percentage points since 2015.

In general, the shadow economy which still makes up around a quarter of the Lithuanian economy is shrinking largely due to economic growth and increasing income. However, there is a different tendency in the field of excise goods where illegal trade seems to be on the rise again,” says Vytautas Žukauskas, vice-president for research at LFMI.

According to a representative population survey implemented by a market research company “RAIT” on behalf of LFMI, 12% of Lithuanians have purchased or consumed illegal alcohol within the last year, representing a 4% increase since 2015. Moreover, population attitude survey shows that more and more people justify illegal trade and consumption of alcohol. Merely 45% of Lithuanians are totally against illegal trade today as compared to 55% in 2015.

One fifth of the surveyed, most of whom have consumed illegal goods within the last year justified the purchase and consumption of illegal alcohol. The government must take this seriously. Even the booming economy cannot outweigh ill-founded political decisions; more and more people choose illegal alcohol due to significant increases in excise duties, leading to higher prices. When legal goods become too expensive, people seek for alternatives thus creating conditions for shadow economy in the field of excise goods,” says Vytautas Žukauskas.

The purchase and import of alcohol from other countries has also become a widespread phenomenon in Lithuania with more and more people visiting the neighboring countries to purchase alcohol. According to a representative population survey implemented by “Baltic Surveys”, within the last year 7% of Lithuanians have purchased alcohol in Poland, 4% in Latvia, and 2% in Belarus or Russia.

Purchasing legal alcohol in other countries is an alternative to the shadow market. The economic forecasts have materialised – instead of paying taxes in Lithuania, more and more people do it in the neighbouring countries,” notes Vytautas Žukauskas.”

Moreover, according to an “empty pack survey” by “Nielsen”, in 2017 the illicit tobacco market in Lithuania also grew by two percentage points, reaching one fifth of the overall market share. To compare, illicit tobacco occupies 24% of the market in Latvia and 13% in Estonia. It is mostly smuggled into Lithuania from Belarus.

In general, the shadow economy in Lithuania is in decline mostly thanks to economic growth and increasing income. However, the aforementioned tendencies show that incentives such as higher excise duties may boost illegal trade even during economic upturns. This is a clear indication that political decisions must obey economic laws or they will remind of themselves,” concludes Žilvinas Šilėnas, president of LFMI.