The Hesitant boom: Indonesia's oil palm sub-sector in an era of economic crisis and political change

Abstract

The paper was prepared for the Programme on the Underlying Causes of Deforestation of CIFOR, and discusses the threat to forest land in Indonesia from expansion of the oil palm subsector, and various other aspects of this industry. From 1967 through to 1997, oil palm was one of the fastest growing subsectors of the Indonesian economy, increasing 20-fold in planted area and showing 12% average annual increases in crude palm oil (CPO) production. While the growth of the oil palm subsector has conferred important economic benefits, it has posed an increasing threat to Indonesia's natural forest cover. Local communities have also been displaced by the large-scale oil palm plantations and social conflict has resulted. At the beginning of the economic crisis, there was every expectation that the oil palm boom would not only continue, but would also be propelled by the currency depreciation and lifting of foreign investment constraints. However, a slowdown in area expansion and CPO production took hold instead. For 1999, the government estimated that only 177 197 ha of oil palm would be planted. While this is a large area increase, it is a 33% decline in plantation expansion in comparison with the 266 565 ha planted in 1997. CP0 production also declined for the first time since 1969 and reached only 5 million tonnes in 1998. This was a 7% decline in production from 1997, when it reached almost 5.4 million tonnes. Among the key reasons for the slowdown are: (1) the government export tax policy; (2) reform policies that targeted the oil palm subsector; (3) social unrest and the consequent withdrawal and withholding of foreign investment; (4) changes to the CPO distribution system; (5) credit access difficulties; (6) changes to the state-owned plantation sector; (7) the 1997-98 El Niño Southern Oscillation phenomenon and consequent drought and fires; (8) a precipitous decline in the world price of CPPO; and (9) increased production costs. It now seems that the Indonesian oil palm subsector is poised for a return to the pace of growth that prevailed prior to the economic crisis. Many companies increased their planting targets for 1999 and CP0 production was expected to increase by 12% to 5.6 million tonnes in 1999. The growth in CPO production is mainly attributed to an increase in rainfall after the 1997-98 El Niño. However, several other factors have stimulated plantation development, and will continue to do so. Among these are: (1) lower interest rates; (2) regulatory changes that facilitate further oil palm development; (3) debt restructuring opportunities; (4) the availability of land cleared through the El Niño drought and related forest fires; (5) predicted growing global demand for CPO; (6) the drastic reduction of the export tax by the government; and (7) cooperation between Indonesian and Malaysian oil palm producers to push up the price of palm oil and regain their share of the vegetable oil market. While the government is committed to emphasizing oil palm development in Eastern Indonesia, particularly in Kalimantan and Irian Jaya, most expansion can be expected to occur in Sumatra in the near future. Oil palm companies will, however, continue to apply for concession areas in Kalimantan, Irian Jaya and Sulawesi in the near term to gain access to forest land. Unless there are fundamental changes in the way forest land is allocated in Indonesia further expansion in the oil palm subsector will continue to pose a significant threat to Indonesian forest cover.