Reading Time: 4 minutes

Authors: Rania Teguh and Albert Jehoshua Rapha, CSIS Indonesia

Indonesia is the world’s largest palm oil producer. On 28 April 2022, the government ordered an export ban designed to address domestic cooking oil shortages and reduce food prices. The policy extends to crude oil and refined products, and is expected to last until the price of cooking oil dips below Rp 14,000 (US$1) per litre.

This decision comes as a shock to the market amid fears that the ban will worsen global food inflation, adding uncertainty to a market that has already suffered massive price swings. The policy resembles the coal commodities export ban of January 2022, when the government stopped coal exports due to reduced domestic supply.

The prices of these two commodities have increased globally, but the Indonesian government wants them to stay low. The large gap between the domestic price and the astronomical prices companies can receive from international markets has incentivised these companies to export palm oil.

Before enacting the export ban, the government implemented several regulatory revisions from January–March 2022. These included a single price policy, a domestic price obligation and domestic market obligation, a highest retail price, and direct cash assistance. These policies have been largely unsuccessful, raising doubt among citizens over the government’s failure to provide reasonably priced cooking oil.

The situation was aggravated when widespread protests broke out in several cities led by students demanding a concrete solution for the price of cooking oil. The level of public distrust is reflected in a survey by Indikator Politik Indonesia in April which showed that 80 per cent of respondents wanted the government to provide reasonably priced consumer goods. It also highlighted a significant reduction in President Joko ‘Jokowi’ Widodo’s approval rating from 71.7 per cent in January 2022 to 59.9 per cent in mid-April 2022.

Given the escalating uneasiness among citizens, Jokowi attempted to increase his approval rating by announcing the export ban, with the intention of decreasing the cooking oil prices in time for the Lebaran holiday. Jokowi also stressed the importance of securing domestic palm oil supply.

This populist move by Jokowi was supported by 66.3 per cent of respondents. At the same time, 73.1 per cent believed that lucrative palm oil exports are the leading cause of the domestic shortage. Jokowi’s communication strategy successfully persuaded the general public that the export ban was the correct solution.

Jokowi’s approval rating increased to 64.1 per cent around the time the ban was announced, along with an increase in confidence in the government’s ability to implement the right policies. Given that Indonesia is a developing country, it is not surprising that people are inclined to prioritise economic factors over other measurements when evaluating the government’s performance.

Yet the rebound in Jokowi’s approval rating only lasted temporarily as the policy outcomes were out of the public’s expectations. The latest survey in May spots that Jokowi’s approval rating fell to 58.1 per cent, marking the lowest point over the past six years. This downturn trend reflects the public’s dissatisfaction with the cooking oil prices that remain high. The majority of respondents (72.8 per cent) argued that cooking oil prices are still not affordable, though 89.5 per cent of total respondents still unflinchingly support the ban policy.

The ban has a huge potential to create chaos in the local oil industry following the significant sinking of fresh fruit bunches (TBS) prices up to 60 per cent in several regions since 28 April 2022, implicating a considerable loss of up to Rp 3.5 trillion (US$23,831,500) per month for Indonesian farmers. If the government disregards this situation, there will be a consequential spillover effect on domestic socio-economic stability as the wave of protests led by Indonesian farmers demanding the government end the ban has started to surface.

But the export ban on palm oil has the potential to affect Indonesia’s reputation among trade and investment partners, as well as other international organisations. The ban is contrary to economic policies enforced in a global trade setting. Amid high instability from war and the COVID-19 pandemic, the world does not need other commodity-producing countries to create more uncertainty every time a shock occurs in its domestic market.

The ban could also lead to a loss of confidence among trading partners in Indonesia’s commitment to various economic and trade agreements. The situation warrants consideration from other nations given that Indonesia currently holds the G20 presidency and will be the ASEAN chairman in 2023.

The scarcity of cooking oil and uncontrolled price spikes have the potential to reappear again. In the long term, the government must be able to regulate the behaviour of palm oil tycoons who have monopolised the cooking oil industry. Reinvigorating domestic public trust is necessary. But Jokowi’s cabinet needs to re-examine the impact of the ban, both domestically and globally, on an already fragmented trade and economic environment.

Rania Teguh is Research Intern at Centre for Strategic and International Studies (CSIS), Indonesia and an economics student at The Australian National University.

Albert Jehoshua Rapha is Research Intern at the Centre for Strategic and International Studies, Indonesia.

The post Indonesia’s palm oil export ban is a double-edged sword first appeared on News JU.

Subscribe to The New York Times

Subscribe to our email newsletter for useful tips and valuable resources, sent out every Tuesday.