The government looks likely to provide incentives to crude palm oil (CPO) producers to encourage them to supply the domestic market, instead of forcing them to do so by imposing higher export duties.
"I think we have all agreed to use incentives, rather than taxing exports, as the primary instrument to encourage the downstream processing of CPO by local industry," the Trade Ministry's director general for research and development, Erwidodo, said Thursday.
"We're now exploring the possible forms this instrument could take," he said. One possibility would be to scrap value-added tax (VAT) on CPO producers that supplied their production to the domestic market.
A government interdepartmental team is currently discussing ways to enhance domestic downstream processing of CPO. Indonesia currently exports more than 70 percent of its CPO production.
Earlier reports suggested that the government was planning to hike the export duty on CPO from 1.5 to 7 percent. However, the possibility of such a move has been strongly resisted by growers and CPO producers, which argue that higher duty would hurt the industry.
M. Fadhil Hasan of the Institute for Development of Economics and Finance (INDEF) said the imposition of higher duty would have a long-term impact on the competitiveness of Indonesia's CPO industry in the international market.
"Should the export duty be raised by 1 percent, the market share of Indonesia's CPO industry would drop by 0.8 percent in the first month and up to 1.1 percent in the second month," he said.
Director General Erwidodo acknowledged that higher export duty was not the only instrument available to accelerate the development of the local downstream CPO industry.
He said that long-term instruments, such as improving infrastructure and overhauling the investment climate, were also crucial for the development of the downstream industry.
"Malaysia has done this. They already have ports and roads to support the industry," he said.
Indonesia produced 16 million tons of CPO last year, surpassing Malaysia's production and making it the world's largest CPO producer.
However, it exported 14 million tons, leaving only 4 million for domestic consumption.
The Agriculture Ministry hopes that it can increase the area of the nation's oil-palm plantations from 5.5 million hectares to 8 million hectares in 2010, with CPO production expected to reach 21 million tons as a result.
The ministry's director general for plantations, Mukti Sarjono, said a plantation revitalization scheme had been designed to achieve the target, which would include the provision of a 10 percent bank-interest subsidy to CPO planters.
"The subsidy will be provided until the plantation starts producing. The maximum limit under the program will be five years," he said, adding that the ministry had signed an agreement for the operation of the scheme with a number of banks, including Bank Mandiri, BNI and Bank Bukopin.
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