The Indonesian government has doubled the upper limit of palm oil export levies to dissuade companies from exporting the product amid a domestic shortage of palm oil-based cooking oil.

The finance ministry on March 18 issued a regulation that raises the progressive levy up to $375 per tonne of crude palm oil (CPO) when international prices are above $1,500 per tonne. Previously, the levy maxed at $175 per tonne. The Crude Palm Oil Support Fund (BPDKS) will collect the funds.

Trade minister Muhammad Lutfi on March 17 said the government would raise the overall upper limit of palm oil export taxes – the export levies combined with custom duties – by 80 per cent to $675 per tonne.

The trade ministry also issued last week ministerial regulation No 11/2022 to retract the domestic market obligation (DMO) policy that required palm oil producers to set aside 30 per cent of their output for domestic consumption. This is the fourth revision of that regulation.

“So, this is a market mechanism. They will no longer need a DMO. Because selling CPO domestically will be more profitable than exporting it,” Lutfi told lawmakers during a meeting with House Commission VI, which oversees trade and investment, adding that the rules came in effect that very day.

The two ministerial regulations mark a shift in the government’s strategy of stabilising domestic cooking oil supplies from using regulatory restrictions to using market mechanisms.

The government introduced the price cap to make cooking oil more affordable as the price of CPO and olein, the raw material to produce the product, surged in recent months. However, the cap resulted in a shortage as producers opted to export instead, skirting restrictions in the process.

Lutfi also blamed the situation on rising global demand for palm oil as countries turned to biofuels to replace oil, whose prices were at record highs, exacerbated by the Ukraine conflict.

The government plans to use the proceeds of the higher levies to subsidise bulk cooking oil, which is mainly used by low-income groups as well as micro-, small- and medium-sized enterprises. The subsidy will help the government maintain bulk cooking prices at 14,000 rupiah ($0.98) per litre.

The trade ministry regulation also removed the price ceiling on packaged cooking oil that was previously limited to 14,000 rupiah per litre. Cooking oil prices rose to around 24,000 rupiah per litre once the ceiling was lifted.

Lutfi said it was urgent to use the BPDKS funds for the cooking oil subsidy as the shortage affected millions of Indonesians. The fund was initially set up to help farmers, but has mostly gone to subsidies, including for biodiesel.

“We’ll have to see first how the market reacts so that it will be more comprehensive,” Indonesian Palm Oil Association (Gapki) secretary-general Eddy Martono told the Jakarta Post on March 18.

Indonesian Consumers Foundation (YLKI) chairman Tulus Abadi lauded the new “market friendly” policy that was expected to better control cooking oil prices.

“For all this time, the government has tried to fight the market, and it proved to be a total failure. It then caused chaos among the public,” Tulus said in a statement on March 17.

Tulus urged the government to closely monitor the distribution of bulk cooking oil for fear that higher income households take advantage of the policy. He also urged the government to switch to a closed subsidy policy where subsidies were given directly to beneficiaries, instead of to producers.

During the House meeting, Lutfi blamed so called “mafia and speculators” as the cause of the government’s inability to control cooking oil prices.

According to ministry findings, there were three kinds of violations – the illegal use of subsidised bulk cooking oil by medium-sized to large companies, the reselling of subsidised bulk cooking oil as packaged products sold under market prices and the exporting of subsidised cooking oil.

“The police will announce the suspects on Monday [March 21],” Lutfi told lawmakers.