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.