The Palm Scribe

Indonesian interest rates much too high to allow development of its palm oil industry

JAKARTA – The high level of lending interest rates in Indonesia is one of the constraints that is hindering the country’s ongoing efforts to boost the national output of palm oil through increased productivity and better cultivation practices, the Indonesian Palm Oil Association (GAPKI) said quoting the results of a research conducted by the Palm Oil Agribusiness Strategic Policy Institute (PASPI) .

ILLUSTRATION. Worker arranges palm oil seedling at a plantation. ILLUSTRATION. Worker arranges palm oil seedling at a plantation.

A PAPSI report published by GAPKI on its official website,  said that efforts to boost productivity, through improvements in cultivation techniques or through improvement in the choice of crop variety are both capital intensive economic activities as well as knowledge intensive. These requires a large amount of capital. The problem is that at present, capital cost/interest in Indonesia are too high and not competitive when compared to other countries, especially other palm oil producing countries.

Credit interests are still above 10 percent in Indonesia while in other countries of the Association of Southeast Asian Nations (ASEAN), the rates are already in single digit. Credit interest in Malaysia, the world’s second largest palm oil producer after Indonesia offers credits carrying interests of below five percent.

Indonesia’s sustainable palm oil industry development strategies, especially the replanting policy which is currently addressing a very urgent problem, is in dire need for policies that would encourage investment in the palm oil sector, upstream and downstream.

The relatively high interest rate in Indonesia presents one of the constraints in investing in the country’s palm oil sector. It is important to come out with policies to overcome this constraint and this could be done by synergizing with the Palm Oil Fund Management Agency (BPDP) to build a future for the Indonesian palm oil industry. One of the agency’s successes so far has been in the development of the downstream industry, especially in biodiesel and Indonesia has successfully attained the mandatory B20 biodiesel mixture requirement and is even moving toward a higher mixture percentage requirements, B30.

In line with this success, the government, through the BPDP-KS could formulate a policy for encouraging investment in  the palm oil industry, especially for the replanting program which has now become very urgent. This could take the form of providing subsidies to cut down on interest for loans linked to investment in the palm oil sector, more specifically in the the replanting program. This, technically, should be formulated together with the banking sector.

The direction for the national oil palm plantation is at present, and also for the near future, to raise the yield of fresh fruit bunch (FFB) to 35 ton per hectare and a oil yield of 26 percent. This, better known as the 35-26 target, is hoped to be able to raise national palm oil productivity to around nine tons per hectare. This drive needs not only a change in strategy but also the support of conducive government policies as well as the action of all stakeholders in the national oil palm plantation sector.

The first solution is by increasing the productivity of productive oil palm crops while the second is through the use of superior seed in replanting efforts. The majority of people’s oil palm plantation are either past their productive age of 25 years or have low yield because of various factors. Policy support is needed to allow more investment, both at the upstream and downstream side of the palm oil sector.

The main stumbling block in this is that interest rates in Indonesia are much too high and are not competitive compared to other countries. The results of empirical studies have shown that lowering credit interest rates would bring very significant results in improving the productivity of oil palm plantations in Indonesia. It will also carry positive impacts on the development of both the upstream and downstream palm oil industry in the country.

The policy that is needed for the future of this strategic industry is a government support, through the Palm Oil Fund, in the form of subsidies on interest rates for investment in the palm oil sector, by smallholders and in the upstream palm oil sector.

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