Why Does the Indonesian Government Need these New Levies?

Indonesia is the world’s largest producer and exporter of crude palm oil. As such, the commodity is a key foreign exchange earner, significantly contributing to tax income as well as local welfare in palm oil-rich regions (Kalimantan and Sumatra). However, after the 2000s commodities boom ended and the global crisis caused sharply plunging commodity prices, revenues generated through the palm oil industry vaporized. As global economic growth remains sluggish, led by slowing growth in China, global CPO prices have declined further. Since September 2014, the government’s reference CPO price has been below the USD $750 per ton threshold, implying that a zero percent export tariff kicked in the following month (this zero percent export tariff rule was designed by the government in an effort to support palm oil exporters, palm oil prices and boost palm oil demand in times of weak market conditions). However, as the reference price has not rebounded, the government has been missing out on much-needed revenue from the palm oil export sector. Therefore, the new export levies were designed to safeguard revenue streams amid low palm oil prices. Government officials expect that the new levies will contribute about IDR 4.5 trillion (approx. USD $340 million) to state income in the remainder of 2015. However, when the reference palm oil price exceeds the USD $750 per ton threshold, then these export levies are scrapped meaning that palm oil exporters will not face a double burden (export tax plus export levy) in times of higher palm oil prices.

What New Palm Oil Export Levies Can Be Used for by the Indonesian Government?

Proceeds from the new palm oil export levies will be used to fund the government’s biofuel subsidy program. In February 2015 the Indonesian government announced to raise biofuel subsidies from IDR 1,500 per liter to IDR 4,000 per liter in a bid to protect domestic biofuel producers. Through this program the government wants to compensate them for the price differences between regular diesel and biodiesel that occurred due to low global petroleum prices (since mid-2014). Besides funding these subsidies, proceeds from the new export levies will also be channeled to replanting, research and the development of human resources in the nation’s palm oil industry.

Through the biodiesel program, the government targets to improve the country’s trade balance (reduce fuel imports) and soak up excess palm oil production. In 2014, the government boosted the mandated amount of palm blending in diesel from 7.5 percent to 10 percent, and ordered power plants to mix 20 percent.

In case the government’s reference palm oil price exceeds the USD $750 per metric ton threshold (implying the export tax kicks in and the export levies are scrapped), then the government will use part of palm oil export tax income to fund its biodiesel program.

Problematic Implementation New Palm Oil Export Levies

The new palm oil export levies were announced in March 2015, finally signed by Indonesian President Joko Widodo in May 2015, but still faced repeated delays (for several months) due to administrative issues and problems surrounding the establishment of the public body that will be in charge of collecting and managing the funds. Due to recent uncertainty about the timing of the implementation of the levies it was difficult for traders to set palm oil prices. Moreover, it raised doubts over whether the levy will be successful in generating planned biodiesel subsidies and showed that the government lacks capacity to implement as well as communicate clear and well-designed policies.

Indonesian Palm Oil Production and Export:

    2008   2009   2010   2011   2012   2013   2014   2015¹
(million metric tons)
  19.2   19.4   21.8   23.5   26.5    27.0    31.0    31.5
(million metric tons)
  15.1   17.1   17.1   17.6   18.2    21.2    20.0    19.5
(in USD billion)
  15.6   10.0   16.4   20.2   21.6    19.0    21.0   

¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture