Contributing Rp 145 T, Palm Oil Becomes Economic Savior During Pandemic

Despite of contraction by 5% during the second quarter 2020, Indonesia’s economic downturn is not as bad as the slump experienced by many other countries. Indonesian economy is still better than other economies of other countries, especially  Singapore which saw a minus growth of 40%. Amid the Covid-19 pandemic that has impacted the world since March 2020, Indonesia managed to shy away from the threat of recession. Why? It is mainly due to palm oil which has been continually performing well and giving a significant contribution to the national economy.

During the normal condition before the outbreak of the Covid-19 pandemic, there have been three economic sectors that have been always competing as the biggest contributors of foreign exchange to the state coffers. The three sectors are palm oil, oil-gas and coal, and tourism. But the oil-gas and coal and tourism sectors are facing a very difficult situation due to the pandemic this year.

The crude oil price dropped to unprecedented low level that had even reached around USD20 per barrel. So did coal price which had also dropped from around USD75 per ton last year to around USD50 per ton this year. Besides the low price, the global economic slump has also weakened the demand for oil-gas and coal exports. The deficit of oil-gas trade balance in May 2020 reached USD5.4 million (source: Bank Indonesia–BI).

Meanwhile, foreign exchange from tourism, which reached around Rp250 trillion last year, could not be expected this year. Even Tourism and Creative Economy Minister Whisnutama said that Indonesia will not only see a decrease of foreign exchange from tourism this year. “But, it is almost none,” said Whisnutama. It is, of course, the direct impact of the Covid-19 pandemic which has forced almost all countries to close access to their countries and tourist destinations.

Palm oil survives

When many economic sectors have to go bankrupt, the palm oil industry keeps surviving. Many businesses in the tourism industry and related industries, including hotels and transportation and manufacturing industries, have to go bankrupt and had to resort to a big-scale of layoffs. It is estimated that 6 million workers in Indonesia became the victims of layoffs due to the Covid-19 pandemic.

The palm oil is one of the few big national industries which are not impacted by the Covid-19 pandemic. Oil palm plantations keep normal operations by implementing the Covid-19 protocol with a tight discipline. With the normal operation and production of almost oil palm plantations across Indonesia, the public welfare of 13 million smallholders and workers in the palm oil industry can be maintained amid the economic slump during this year.

In terms of foreign exchange contribution, the palm oil industry is still the champion. It has become the biggest contributor of foreign exchange for Indonesia during more than one decade. During the year 2019, its foreign exchange contribution reached USD20 billion. During the first semester 2020, the foreign exchange contribution of palm oil sector had reached USD10 billion or around Rp145 trillion, as reported by the Indonesian Palm Oil Association (GAPKI). Its contribution to the state coffers is even bigger if included its contribution from taxes and other non-fiscal contribution.

Despite of the decrease of palm oil production and export volume during the first semester 2020,  the average price of crude palm oil (CPO) is higher than its average price last year. The mandatory B30 program that has been implemented this year, after the success of implementing the mandatory B20 program last year,  has increased the local absorption of palm oil. Amid the weakening export market, the mandatory biodiesel program has ensured the stability of palm oil price at global market.

The mandatory biodiesel program has proven that the palm oil industry has not only ensured the food security, but also the energy security of Indonesia.

Sustainability challenge

The future of Indonesian economy heavily relies on the palm oil industry. As a global commodity competing with other non-palm oil vegetable oils which are produced by countries in Europe and America, the Indonesian palm oil is facing two challenges that should be seriously addressed.

First, how to increase productivity of oil palm plantations, particularly those operated by smallholders who control 43% of the total oil palm plantations of Indonesia. Second, how to ensure the international society that Indonesian palm oil is sustainably produced based on the principles of sustainability. The two challenges are of course difficult to deal with, so that a strong synergy among all stakeholders is needed to tackle the challenges.

Concerning the sustainability challenge, the implementation of the Indonesian Sustainable Palm Oil (ISPO) which has been legally strengthened by the issuance of a presidential regulation (Perpres) should be integrated with the sustainability standard acceptable to the international society. Positive campaigns about the palm oil should be also pursued, not only at home but also abroad, especially in European countries which have been increasingly resistant to the development of palm oil commodity that is currently controlled by Indonesia and Malaysia. (*)

Source: DI’s Way

*) The writer is the communication division chief of the Indonesian Palm Oil Association (GAPKI) Tofan Mahdi and guest editor of DI’s Way.

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