Lutfi out on Indonesia cooking oil slipup. Can Zulkifli offer a quick fix?

President Joko 'Jokowi' Widodo speaks to the media, as newly inaugurated Trade Minister Zulkifli Hasan and Minister of Agrarian Affairs and Spatial Planning Hadi Tjahjanto, who was former Indonesia's military chief, stand besides him at a Presidential Palace in Jakarta, Indonesia, on June 15, 2022. - Reuters

JAKARTA (The Jakarta Post/Asia News Network): That Muhammad Lutfi would be fired as trade minister in last week’s Cabinet reshuffle by President Joko “Jokowi” Widodo was widely predicted, due to Lutfi’s miserable and highly public failure to stabilise the prices of cooking oil over the past six months.

But the appointment of Zulkifli Hasan, chairman of the National Mandate Party (PAN), as the new trade minister has vindicated arguments that Jokowi was not really seeking an experienced professional from the food sector, and simply wanted to strengthen his coalition government instead.

Despite his previous experience as chairman of the Investment Coordinating Board, ambassador to both Japan and the United States, and trade minister from February to October in 2014, Lutfi seemed to be the least politically controversial “cow” to be sacrificed to accommodate PAN in the Indonesia Onward Cabinet.

Actually, the blame for the cooking oil crisis should not rest squarely on Lutfi’s shoulders, but across the inadequate capacities of the agriculture and industry ministries. It also belongs to the coordinating minister of economic affairs with respect to implementing the market interventions.

Zulkifli is the sixth trade minister Jokowi has appointed since October 2014. The five previous trade ministers were also dismissed for their poor performance in stabilising the prices of staple foods and basic necessities.

After all the damage from the series of erratic measures over the past few months, Zulkifli’s first challenge is to improve the relations that have soured between the government and palm oil companies.

Mutual distrust now seems to exist between the government and big industry players after the government’s strong-handed measures over the past six months.

Officials have alleged that big palm oil companies had joined together to form a kind of “mafia”, while the Business Competition Supervisory Commission (KPPU) accused major producers of engaging in cartel-like practices. But none have produced any strong evidence that would stand up in court.

Even the Attorney General’s Office has yet to produce ironclad evidence of any criminal activity, two months after it arrested several senior executives of three major companies as well as the director general of foreign trade.

Palm oil companies must also gear up for auditing by government auditors as ordered by Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan, the President’s most trusted aide.

The comprehensive audit will cover almost all aspects of their operations, including the status of overseas offices, plantation acreage, production capacity and distribution networks.

Palm oil companies have agreed from the outset that government market intervention was imperative to protect consumers from the inflationary impacts of the steep price hikes for cooking oil, a staple food.

After all, the skyrocketing prices of palm-based cooking oils were caused by a global surge in the prices of edible oils, due to the combination of poor harvests in major producing countries, strong demand as Covid-19 restrictions were eased and activities resumed, and Russia’s invasion of Ukraine.

These two countries happen to account for producing 70 per cent of the world’s sunflower oil. But the series of market interventions hastily launched since February, such as fixed price ceilings and domestic market obligation (DMO), were not designed to fit the institutional capacities of the implementing agencies.

The policy flip-flop over the past few months also confused companies. What made things even murkier was that officials tended to blame businesses for the intervention measures’ failure. This sowed the seeds of distrust between the government and businesses, and finally exploded on April 28 in the bombshell government ban on all palm oil exports, with all its devastating implications.

Almost one month after the ban was lifted on May 23, export shipments were still running at a snail’s pace because the government did not improve its DMO management and instead introduced a new and byzantine red tape for export permits.

The new regulations required all palm oil companies to be registered with three digital platforms: the Indonesian National Single Window (INSW), the Bulk Cooking Oil Information Platform and the Cooking Oil for People programme.

The absence of a single institution to take up the cooking oil sold under the DMO scheme forced producers to collect a large number of sales invoices as they have to deal with many distributors, while the validation of their sales invoices is a prerequisite to obtaining an export permit.

This makes the process quite time consuming and complex. We doubt Zulkifli will be able to stabilise cooking oil prices for the long term if the government still refuses to assign a single agency with a nationwide logistics and distribution network to manage and supervise the DMO cooking oil sales.

The key to securing an adequate supply of cooking oil for domestic consumption at the fixed price and facilitating smooth exports is to create a seamless verification process for producers’ domestic sales invoices.

As companies and industry associations have suggested, this points to the imperative need to assign the National Logistics Agency (Bulog), which has logistics networks across the country, to manage and supervise implementation of the DMO policy. This single domestic sales point would avoid producers’ need to verify many invoices with the Trade Ministry.

If producers sell their DMO cooking oil to a single agency like Bulog, then they will have only one invoice to submit when they want to export their products. The main reason why exports continued to stagnate, even almost one month after the export ban was lifted on May 23, was the persistently arduous and complex process of verifying domestic sales invoices as a requisite to obtaining an export permit.

Surprisingly, on June 14, the government took a hasty emergency measure to allow companies to obtain an export permit without fulfilling their DMO but they have to pay US$200/tonne in additional levy (windfall tax) on top of the existing US$288 levy and $200 export tax already imposed on exporters.

This measure, though aimed at flushing out stocks from companies’ overflown storage tanks due to the previous export ban, would push down the domestic price of palm oil and badly hurt the income of oil palm smallholders.

Palm oil companies may very well be nervous as they await the next measures from Zulkifli.

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