Indonesia seen managing inflation risk

Southeast Asian nation can contain price pressures as it resumes palm oil exports, analysts say

Indonesia is expected to keep food inflation at bay despite lifting a ban on palm oil exports, analysts said.

President Joko Widodo has allowed resumption of exports of palm oil from May 23, ending a ban that was put in place late last month in response to rising prices of cooking oil — a byproduct of palm oil. However, palm oil producers are required to reserve a portion of their products for the local market before they can ship overseas. Under the so-called Domestic Market Obligation, or DMO, policy, the nation will retain 10 million tons of cooking oil for the local market.

The export ban was lifted at a time when inflation continues to hit record levels. In April, Indonesia’s inflation rate stood at 3.47 percent, the highest since 2017, on the back of higher prices of food, fuel and transport. The surge in price of cooking oil has been contentious in a country that happens to be world’s biggest exporter of palm oil.

But analysts are hopeful the DMO policy will ensure that Indonesia can control inflationary pressure.

Nicholas Antonio Mapa, senior economist at ING bank, said that by lifting the export ban, the Indonesian government will be able to balance the needs of both the domestic consumers and palm oil exporters.

“Exporters will only be allowed to send out products should they secure a domestic market obligation. This way, authorities can ensure the stable supply of palm oil and its derivatives to help limit price pressures while also allowing exporters to sell products abroad,” Mapa told China Daily.

Mapa noted that palm oil export receipts have helped keep Indonesia’s balance of trade in a healthy surplus and has strengthened the Indonesian currency against the US dollar.

Indonesia’s central bank said that current account surplus in the first quarter hit 0.1 percent of GDP. Higher international commodity prices have lifted Indonesia’s coal and palm oil export revenues, contributing to a trade surplus.

Sanjay Mathur, chief economist for Southeast Asia and India at ANZ Bank, said that it is also possible that the export ban has led to an “unmanageable rise” in domestic palm oil inventories. But with the ban lifted and the DMO policy enforced, palm oil producers can release their stock without affecting prices.

Indonesia has suspended the shipment of palm oil since April 28 following a sharp rise in prices of cooking oil in the local market. Cooking oil, which was priced at 14,000 rupiah (96 cents) per liter in 2021 was being retailed at 22,000 rupiah per liter in March this year.

Lower production of palm oil in 2021, owing to erratic weather patterns, and labor shortage and limited supply of fertilizer has reduced the supply of cooking oil in the local market. The situation was aggravated by the rising demand for biodiesel and the Russia-Ukraine conflict that slashed global supply of vegetable oil. Ukraine and Russia are both key exporters of sunflower oil.

The Indonesian government has tried to control the rise in cooking oil prices by imposing a 14,000 rupiah per-liter price ceiling in January. But the move only led to hoarding and speculation. Also, palm oil producers were reluctant to sell at such low prices. The government lifted the price ceiling in March and decided to impose a higher export levy. On April 27, Widodo announced a palm oil export ban.

Yohanes Sulaiman, lecturer in international relations at Universitas Jenderal Achmad Yani in Bandung, said the export ban was a last ditch effort of the government to curb the rise in prices as the price ceiling failed to do so. “If you want to stabilize the price of cooking oil, you let the market decide. If you put the ceiling on the price of (cooking oil), the (palm oil) producers will just stop (milling the oil palm fruit bunches) because they don’t want to sell oil at a loss,” Sulaiman said.

Indonesian palm oil exporters have appealed the ban, noting that the curb will not only hurt the millers and big exporting companies but also the livelihood of small farmers who sell their oil palm fruit bunches to exporters.