Amid Covid-uncertainty and a massive second wave, Indonesia decided to double down on what its export economy does best: palm oil.
An export tariff cut came into effect over the weekend. The idea is to make Indonesian palm oil and its derivatives irresistible on the global market.
The way the tariff scheme is set up, it’s tethered to the government’s reference price for crude palm oil (CPO). When CPO prices are below a certain threshold (read: low demand), the minimum export tariff will apply to incentivise buying. And if CPO prices are high, the tariff gets progressively higher.
What Indonesia did now is raise the threshold from US$670 to US$750 per metric tonne of CPO. And it also introduced a cap: if prices rise above US$1,000, the export tariff will remain in the highest category, and not rise even further.
Importing regions (mainly India, China, and the EU) have more certainty: they can expect the lowest tariff class, unless there is a demand and price hike beyond the now higher US$750 threshold, and even if there is a real surge, tariffs won’t exceed the cap. The palm oil price has been volatile lately, given pandemic driven fluctuations in demand.
Indonesia is the biggest palm oil exporter in the world but is in constant competition with its neighbour Malaysia, which already has more attractive tariffs.
Palm oil production in Indonesia has been climbing despite the pandemic, from 47.12 million metric tonnes in 2019 to 48.3 million metric tonnes in 2020.
Malaysia, meanwhile, saw a 3.6% decline, from 19.86 million metric tonnes in 2019 to 19.14 million metric tonnes in 2020. Malaysia relies on migrant workers on its palm oil plantations and struggled with a labour shortage during the pandemic, which was less of a problem in Indonesia.
Getting Indonesian palm oil out there may help the economy. The country’s GDP was still in contraction in the January-March quarter of 2021, albeit at a low 0.74%. Palm oil makes up 15% of all Indonesian exports, and is thus an important foreign exchange earner. According to government data, it contributes some 2.5% to the country’s GDP.
But it raises two questions. Are Indonesian palm oil plantations equipped to cater to growing demand without further environmental destruction? And if exporters get less due to lower tariffs, won’t they simply pass those losses on to the smallholder farmers, paying them lower rates for the palm oil fruit?