Govt to review policies on sugar (2)

By Beddu Amang

This is the second of two articles based on a paper presented in the International Sugar Council meeting in London on Nov. 28, 1997.

LONDON: The domestic sugar market continues to require imports. Even before this year's currency crisis, the government expected that the sugar supply shortfall would be around 800,000 tons.

Of course, today's economic environment is radically different from that a few months ago and some of the plans to establish new sugar mills will need to be reviewed as the rupiah has experienced a significant depreciation against the U.S. dollar.

To restore confidence in the economy, the government has undertaken a wide range of policy reforms, including decisions to rein in government spending and to open the economy as much as possible to international trade.

How do these changes affect the sugar industry in Indonesia? Obviously, such a large change in the economic environment has a range of effects on the sugar industry, some of which are even beneficial.

Indonesian sugar, for instance, is suddenly much more competitive against producers from other countries, as dollar- denominated imports now cost much more in rupiah terms. Some mills that previously could not produce efficiently may find it possible to compete at the new world price. Thus, the rupiah depreciation has fundamentally altered the competitive position of the Indonesian sugar industry.

Domestically, consumers will pay more in the future for their sugar. With imports costing more, the average cost of sugar in rupiah terms is bound to rise. Retail prices are expected to adjust quickly to partly-import levels.

The rising domestic price of sugar will in turn cause a decline in the domestic demand. Although it is not the intention to discourage domestic sugar consumption, a slowdown in the demand for imported sugar will be welcomed at this time, as Indonesia tries to restrain imports to help improve the balance of payments. The shift towards greater consumption of domestic sugar and lower reliance on imported sugar will help Indonesia move towards its objective of sugar self-sufficiency.

Finally, the new economic environment forces Indonesia to review its plans to expand domestic production. To stabilize the economy, a wide range of investments have been postponed. But where investments in sugar appear profitable, private investment will be encouraged to proceed without much direct government assistance.

We remain committed to the objective of self-sufficiency in sugar production, but development in this direction must be guided by market incentives. The National Logistics Agency (Bulog) has been charged with protecting the food security of all Indonesians, and this can be accomplished best by expanding domestic supply where and when it is efficient to do so, while relying on the world market to ensure that domestic requirements are met.

Indonesia, and indeed most Southeast Asian countries, have weathered a number of turbulent months recently, but our economy remains strong and more open than ever before. The government feels that there are still reasons for Bulog to remain involved in the sugar sector, and we will continue to perform our function as long as we are called on to do so. Protecting the food supplies for the fourth most populous nation on earth, with people spreading throughout the archipelago of 13,000 islands, is a huge but rewarding task.

Nonetheless, as the Indonesian economy develops and connections between markets become more reliable, the need for Bulog's involvement will decline. The recent economic turmoil provides an excellent opportunity to raise the efficiency of our domestic sugar industry.

Dr. Beddu Amang is chairman of the State Logistics Agency and president of the Asian Society of Agricultural Economists.