Palm oil game changer

Pakistan and Indonesia have ratified a Preferential Trade Agreement (PTA) clearing the way for trade liberalisation between the two countries. Under this agreement, Pakistan will offer preferential tariffs to Indonesia on 287 tariff lines, while Indonesia will reciprocate with similar offers on 216 tariff lines. The list of those items whose trade will likely be affected as a result of this deal is long; however, none will be watched by economic managers in Pakistan more closely than palm oil. Pakistan is direly affected by changes in the price of palm oil. The local consumption of edible oil is roughly 33 million tons out of which approximately 26 million tons are imported while just 600,000-700,000 tons are produced locally. Out of the 23 million tons of edible oil imported from the country, roughly 20 million tons are of palm oil. A few years back, up to half of all palm oil imports in Pakistan were sourced from Indonesia. However, that countrys share in Pakistans imports of palm oil has fallen rapidly in the past 4-5 years to a mere 2.15 percent in FY10. This rapid fall came in the aftermath of the granting of most favored nation status by Pakistan to Malaysia; Indonesias main competitor in the palm oil market. Importers of edible oil in the country claim that Malaysia is benefited through a margin of preference of 15 percent. However, they lament that Malaysian exporters have predominantly reaped the benefit of this cost differential and only transferred a small proportion of the savings to buyers in Pakistan. Now, the PTA ratified by Pakistan and Indonesia in early February will grant similar concessions to Indonesian exporters of the edible oil, thus bracing them to be able to compete with Malaysian rivals. Palm oil prices have also shown signs of weakness in recent days with stocks of the commodity piling up with major exporters against slowing demand. International market participants are concurrent that in the absence of any major revival of demand from the EU, palm oil prices will test lower levels in coming weeks. For Pakistan, which continues to grapple with the perils of a fragile balance of payments, the falling prices of palm oil and the growing competition amongst its exporters is a certain positive development.