MARKET DEVELOPMENT
Palm oil export tax
Palm oil export tax
20/6/07 ( The Jakarta Post) - The government finally decided last week to increase the export tax on crude palm oil and its derivatives from about 1.5 percent to 6.5 percent per metric ton, in a concerted effort to help bring down domestic cooking oil prices to below Rp 7,000 per kilogram, or US$777 a ton, compared to the international price of around $800.
The market operations conducted jointly by the government, in cooperation with crude palm oil (CPO) and cooking oil producers, since early May failed to stabilize domestic cooking oil prices at the desired range of between Rp 6,500 and Rp 6,800/kg because the operations never achieved the necessary volume.
The market operations faltered due to the lack of a legal foundation and unclear rulings on tax deductions for volumes sold below market prices, even though the government had threatened to slap punitively high export taxes or to impose domestic market obligations on CPO and cooking oil producers.
These two measures were considered the most effective for stabilizing domestic cooking oil prices because the high prices have nothing to do with a sudden surge in demand, nor with a severe shortage of domestic supply. In fact, Indonesia exports only around one third of its total CPO production of 16 million tons last year.
The main reason behind the jump in prices to as high as $800/ton from $595 earlier this year is the surge in international prices set off by a big increase in demand for cooking oil in India and China, and for CPO for bio-fuels in Europe.
The government certainly had to intervene in the market, otherwise domestic CPO and cooking oil producers would automatically adjust their domestic sales prices to international quotations or, if not allowed to do so, would have preferred exporting all their output.
Raising a tariff barrier to exports (export tax), instead of imposing domestic market obligations pro-rata on producers, is a better measure, viewed from the principle of policy consistency in international trade and from the government's institutional capacity to collect the export tax.
Moreover, the level of the export tax (6.5 percent) is low enough to deter export smuggling, which was quite extensive in 1998 when the export tax on CPO was set as high as 60 percent. Such a low export tax was made possible because the domestic ceiling price target set by the government is Rp 7,000/kg or ($777/ton), as compared to the current international price of around $800.
Resorting to non-tariff barriers such as export quotas or domestic market obligations would create uncertainty in the palm oil industry at a time when the government has been aggressively promoting the development of CPO to support its massive bio-fuel production program. Such measures also would be ineffective given the vast coastal areas that offer broad opportunities for export smuggling. For example, Riau province, currently the country's second largest CPO producer after North Sumatra, is less than a one-hour boat ride from Singapore or Malaysia.
But the government should keep itself well posted on the latest developments in the international CPO market to allow for a monthly determination of an appropriate level for the average price on which the export tax is based. Too low or too high a reference price for the imposition of the export tax would not be effective for maintaining an adequate supply of cooking oil on the domestic market.
But the Business Competition Supervisory Commission should also look into the complaints of alleged oligopolistic practices among several major producers.
Yet most important is that the government should set a transparent mechanism for the accountability of revenues from the export tax. Certainly the export tax proceeds should be reinvested in the oil palm industry, notably to help smallholders, who account for two million of the six million hectares of oil palm plantations in the country, to raise their crop yield through better seedlings and other innovations.
However, if international prices continue to rise steeply, the government should use part of the export tax receipts for subsidizing the domestic price of cooking oil. This is what the Malaysian government has been doing with proceeds from the levy (called cess) it has imposed on palm oil exports.
Never should the government resort to imposing export quotas, domestic market obligations or overly high export taxes, as these measures would only scare away new potential investors in the palm oil industry.
The market operations conducted jointly by the government, in cooperation with crude palm oil (CPO) and cooking oil producers, since early May failed to stabilize domestic cooking oil prices at the desired range of between Rp 6,500 and Rp 6,800/kg because the operations never achieved the necessary volume.
The market operations faltered due to the lack of a legal foundation and unclear rulings on tax deductions for volumes sold below market prices, even though the government had threatened to slap punitively high export taxes or to impose domestic market obligations on CPO and cooking oil producers.
These two measures were considered the most effective for stabilizing domestic cooking oil prices because the high prices have nothing to do with a sudden surge in demand, nor with a severe shortage of domestic supply. In fact, Indonesia exports only around one third of its total CPO production of 16 million tons last year.
The main reason behind the jump in prices to as high as $800/ton from $595 earlier this year is the surge in international prices set off by a big increase in demand for cooking oil in India and China, and for CPO for bio-fuels in Europe.
The government certainly had to intervene in the market, otherwise domestic CPO and cooking oil producers would automatically adjust their domestic sales prices to international quotations or, if not allowed to do so, would have preferred exporting all their output.
Raising a tariff barrier to exports (export tax), instead of imposing domestic market obligations pro-rata on producers, is a better measure, viewed from the principle of policy consistency in international trade and from the government's institutional capacity to collect the export tax.
Moreover, the level of the export tax (6.5 percent) is low enough to deter export smuggling, which was quite extensive in 1998 when the export tax on CPO was set as high as 60 percent. Such a low export tax was made possible because the domestic ceiling price target set by the government is Rp 7,000/kg or ($777/ton), as compared to the current international price of around $800.
Resorting to non-tariff barriers such as export quotas or domestic market obligations would create uncertainty in the palm oil industry at a time when the government has been aggressively promoting the development of CPO to support its massive bio-fuel production program. Such measures also would be ineffective given the vast coastal areas that offer broad opportunities for export smuggling. For example, Riau province, currently the country's second largest CPO producer after North Sumatra, is less than a one-hour boat ride from Singapore or Malaysia.
But the government should keep itself well posted on the latest developments in the international CPO market to allow for a monthly determination of an appropriate level for the average price on which the export tax is based. Too low or too high a reference price for the imposition of the export tax would not be effective for maintaining an adequate supply of cooking oil on the domestic market.
But the Business Competition Supervisory Commission should also look into the complaints of alleged oligopolistic practices among several major producers.
Yet most important is that the government should set a transparent mechanism for the accountability of revenues from the export tax. Certainly the export tax proceeds should be reinvested in the oil palm industry, notably to help smallholders, who account for two million of the six million hectares of oil palm plantations in the country, to raise their crop yield through better seedlings and other innovations.
However, if international prices continue to rise steeply, the government should use part of the export tax receipts for subsidizing the domestic price of cooking oil. This is what the Malaysian government has been doing with proceeds from the levy (called cess) it has imposed on palm oil exports.
Never should the government resort to imposing export quotas, domestic market obligations or overly high export taxes, as these measures would only scare away new potential investors in the palm oil industry.