The IMF and export tax on crude palm oil

The IMF and export tax on crude palm oil

By Derom Bangun

JAKARTA (JP): I was very impressed when I stepped into the
International Monetary Fund (IMF) office in Washington D.C. back
in 1986. Together with my classmates and faculty members from the
Sloan School of Management, Massachusetts Institute of Technology
(MIT), we were briefed on the principle and the mission of the
fund.

The Indonesian public in general, and palm oil producers in
particular, were filled with hope when the IMF stepped in as the
monetary crisis reached a worrying stage. Without going through
the details of the rescue package, one could rest assured that
the program would bring the economy back to normal conditions
through a trade liberalization process.

Even during the process, one could expect that any naturally
strong line of business would be protected from unfair treatment.
And palm oil producers were certain that their line of business
was strong and profitable since their products were in high
demanded not only on the domestic market but even more so on the
world market.

When the crisis began to worsen at the beginning of July,
1998, the Indonesian government, in an effort to stabilize the
price of cooking oil, increased the export tax of crude palm oil
(CPO) to 60 percent, from 40 percent. This was swallowed bitterly
by the palm oil producers; in a time of crisis, a 60 percent
reduction of revenue should be accepted and considered as a
contribution to the country.

The crisis has slowly calmed down, as indicated by the
improving distribution and availability of basic needs, including
cooking oil, and by the strengthening of the rupiah from 15,000
to under 8,000 to the dollar in October 1998.

The price of cooking oil has been lowered from Rp 6,000 to Rp
3,000 per kilogram, and the selling price of CPO has fallen to Rp
2,000 per kg. As far as the CPO export tax is concerned, the
government stays silent.

Is this condition in line with IMF principles and package
program?

Does the IMF need to interfere or to touch upon the matter in
its monthly evaluation? Palm oil producers prefer not to try to
approach the IMF, knowing that it has a good understanding of the
current economic condition, including the impact of the CPO
export tax on the economy in general and on the palm oil industry
in particular.

The man on the street may be unaware of the fact that such an
export tax is resulting in a transfer of earnings from palm oil
producers and oil palm farmers to cooking oil consumers. And
cooking oil consumers number 200 million people, comprising 80
million who really need help and 120 million who are relatively
better off than many oil palm farmers. Such transfers of earnings
is neither educative nor fair.

One should not pretend that the IMF is not aware of this. It
is more appropriate to think that the IMF is sure that everybody
is taking care of their homework.

That is why the palm oil producers and oil palm farmers prefer
to wait and count on the wisdom of the government. They say to
themselves that any regulation which is disadvantageous to the
country and to the IMF will certainly be corrected, sooner or
later. Rationally speaking, a more conducive business climate for
a highly productive and profitable line of business will attract
more investments, resulting in better economic capability to
develop and to repay the loan. Therefore, the sooner the
correction is made, the better.

It was reported that the IMF demanded that the CPO tax be
reduced to 10 percent by December 1999. A 50 percent reduction in
less than 13 months is not an easy task. There were opportunities
to make a reduction in September and also in October of this
year. Unfortunately, such opportunities were seized by the
government.

One may think of a reason, like the People's Consultative
Assembly Special Session in November 1998. Any price disturbance
in not welcome. If such a reason is considered more important
than any other reason, one can expect that the reduction of this
tax will also be impossible in the months of April and May 1999
because the general election will also demand a calm and stable
condition.

Taking that consideration, one can deplore the possibility of
a gradual reduction, say 3 percent to 4 percent per month, and
work out a formula so that a sudden increase of price will not
result.

At the same time, the tax structure of CPO and its derivative
can be modified with an objective of more fair treatment to the
processors, producers and farmers. Fair treatment to oil palm
farmers and their counterparts in coconut farms should also be
considered. Furthermore, the formula could include the
international CPO or cooking oil price and rupiah-to-dollar
exchange rate as variables to maintain the price of domestic
cooking oil at a predetermined level. Such a formula would
automatically change the magnitude of the export taxes as the
international price and the exchange rate move up and down. All
this can be done without the interference of the IMF. The
objective, as expected by all the people, is to have an export
tax regulation and schedule for the benefit of the country.

The writer is vice chairman of the Indonesian Palm Oil
Producers Association and also chairman of the ASEAN Vegetable
Oils Club.