Govt policy on CPO sales ineffective, say analysts

The Jakarta Post, Jakarta

The government's moves to up the export duty on palm oil, and to encourage producers to sell part of their production on the domestic market so as to bring down cooking oil prices are short-sighted and will ultimately prove ineffective, senior economists say.

Faisal Basri, a noted economist at the University of Indonesia, said Friday that such solutions would not only fail to curb surging prices, but could in fact be counterproductive.

He said that fiscal policy would be effective only if the proceeds were used to finance market interventions in order to bring down prices.

"Asking CPO producers to voluntarily set aside part of their production for the domestic market will be ineffective and is not strict enough," he said. "The requirement should be made mandatory, not voluntary," he added.

According to Faisal, it is the government that should play the major role in the price stabilization efforts, rather than the producers.

"The government is acting more like a mediator instead of a stabilizer in handling the price increases."

The price of cooking oil has surged to Rp 9,000 from Rp 6,500 (72 U.S cents) per liter in Jakarta, and as much as Rp 10,000 in some areas outside Java, due to a 30 percent increase in the international price of CPO amid surging demand from China and India. The international price is currently hovering at between US$650 and $772 per metric ton.

As part of the price stabilization program, the government has asked the country's major CPO producers to voluntarily commit to selling part of their production on the domestic market.

In addition, the government has also threatened to increase the export duty on CPO from 1.5 percent at present to 6.5 percent if the price of cooking oil fails to soon return to around Rp 7,500 per kg.

For those who fail to divert the envisaged quantities to the domestic market, the government will even them to pay export duty at the higher rate of 11.5 percent.

Like Faisal Basri, another noted economist, Bustanul Arifin, said that the government's stabilization policy was not only ineffective, but also short-sighted.

"Instead of keeping the revenues from the export duty, the government should use them to subsidize cooking oil for lower-income people, who are badly affected by the soaring prices," he said.

The revenue, he added, could also be used to provide incentives to improve the upstream and downstream sectors of the CPO industry by, for instance, expanding plantations in the upstream sector and developing more products in the downstream sector. "Those could be long-term solutions," he said.

Derom Bangun, chairman of the association of CPO producers (GAPKI), expressed a similar view, saying that the government should contribute more to the scheme by disbursing funds to help low-income people cope with the price increase.

"Actually, the government can use the export duties it has collected in previous months to subsidize cooking oil for low-income people," he said.

Faisal also said that it would be better if the revenues from the export duty were not paid directly into the state coffers, but rather kept in a special account.

"With such a mechanism, it would be easier to use the money for price stabilization purposes," he said.

The government could use a separate bank account managed by the Indonesian CPO committee (Dewan Minyak Sawit Indonesia), whose members were stakeholders in the CPO industry, he suggested.