High export tax on CPO encourages smuggling: Experts

JAKARTA (JP): The government must ease the restrictions on exports of crude palm oil (CPO) products to prevent the country's oil palm plantation companies from collapsing and to help stabilize the country's deteriorating macroeconomic condition, an economist has said.

Head of the Center for Social and Economic Studies Mangara Tambunan also said yesterday that the recent rise in export taxes levied on CPO products would only encourage smuggling. CPO export taxes were recently increased to as high as 60 percent.

He said that the high export taxes would force many oil palm plantation companies out of business because they had come at a time when fertilizer prices were also cripplingly high.

"How can plantation companies offset the soaring cost of fertilizer if they are forced to sell only on the domestic market and are prohibited from benefiting from higher export prices," he told reporters at the presentation of a study on the impact of proposed economic reforms on small and medium-sized enterprises.

The government has abolished subsidies on fertilizers except those used for food crops grown by smallholder farmers.

The government raised taxes levied on the export of CPO, which is used to produce cooking oil, in an attempt to force producers to sell on the local market and push down domestic prices.

The export tax was increased to 60 percent after a 40 percent tax imposed in April failed to curb CPO exports. Exporting has become a very attractive option for producers since the rupiah dropped sharply in value against the U.S. dollar.

The international price of CPO is currently hovering at US$0.70 per kilogram compared to the domestic price of Rp 6,000 ($0.40) per kilogram.

Mangara also said that CPO policy should be refocused toward obtaining foreign exchange because that would help to revitalize the rupiah and stabilize the country's economic situation.

"We really need foreign exchange to stabilize our economy," he said.

The rupiah was trading at around Rp 15,000 to the U.S. dollar yesterday, compared to its pre-crisis level of Rp 2,450 in July.

Other commentators at the discussion said the anti-export policy would only encourage rampant smuggling of CPO products.

They pointed out that to circumvent the tax, producers had started to export palm kernel to Malaysia where it was then being refined into CPO and its derivatives.

"Traders will always find loopholes," one commentator said.

Mangara also said that by increasing the export tax to 60 percent the government might raise questions among the international community about its commitment to implementing the package of reforms which it has agreed with the IMF in exchange for massive emergency loans.

He pointed out that Indonesia had agreed with the IMF to limit the export tax on CPO to 40 percent.

"The government must rethink the policy," he said, adding that maintaining a low cooking oil price should not be a top government priority in tackling the year-long economic crisis.

"CPO is not an essential commodity. We're not going to starve if we don't consume fried food," he said.

Mangara, Thee Kian Wie of the National Institute of Sciences (LIPI), and Tulus Tambunan of the Indonesian Chamber of Commerce and Industry (Kadin) yesterday presented a joint study funded by the Asia Foundation on the impact of the package of reforms agreed with the IMF on small and medium-sized enterprises.

The study concluded that the package would have a positive effect on small and medium-sized enterprises in the long-run, but a devastating short-term impact.

The study pointed out that plans to abolish subsidies on fuel and other essential items would crush many companies which were already experiencing plunging demand and having difficulty paying for raw materials.

The manufacturing sector would be the worst affected by the removal of subsidies on fuel and electricity, but the agricultural sector would not be so badly hit, it said.

"Many small textile, garment and shoe manufacturers will be forced out of business unless the government provides them with temporary assistance," Tulus said.

He urged the government to include salvageable small and medium-sized ventures in its social safety net program.

Small and medium-scale businesses have the potential to provide workers laid-off from large companies with alternative employment, he said.

Mangara, however, stressed that it was important for the government to commit itself to the package of reforms because without macroeconomic stability, any special assistance directed toward the nations entrepreneurs would be useless.

He pointed out that there were over 34 million small or medium-sized enterprises in the country which contributed 39 percent of gross domestic product in 1994. (rei)