Smarter imports in edible oil

While Pakistan does not have indigenous sources of edible oil, it does have ample capacity to convert crude palm oil (CPO) to refined palm oil. Currently, the edible oil refining industry is operating at less than 50 percent capacity. However, in order to promote refined products and value added goods, exporting countries tax CPO exports.

While little can be done about export tax imposed by Indonesia and Malaysia, Pakistan can skew its tariff structure in favour of CPO imports rather than RBDPO (refined, bleached, and deodorized palm oil). Currently, refined palm oil is taxed at the same level as crude palm oil. That coupled with exporting countries duty on CPO removes incentive for local manufacturers to import crude oil and refine it though having facilities to do so.

Take India’s example, in the past India’s import tax on crude palm oil was 15 percent while its duty on refined palm oil was 25 percent. Over time it has developed an indigenous oil seed market and hence raised import taxes to its highest levels in more than a decade despite being the world’s largest importer of edible oils. Last year, India raised tariffs to 30 percent on CPO and 40 percent on RPD palm oil while duties on other competing edible oils have been raised as well.

The need for similar measures has been echoed by various stakeholders in the industry. Though domestic production needs to be promoted in the short run, value addition would support the local producers in the short and medium term. In the recently held Indonesian palm oil conference, Abdul Rasheed Jan Mohammed, CEO of Pakistan Edible Oil Conference and Westbury Group, highlighted Pakistan’s tax and tariff structure which does not differentiate between crude oil and refined oil.

Currently about 70 percent of edible oil imports originate from Indonesia. In recent years Indonesia has invested heavily in increasing palm oil production. By 2020, Indonesia will have a surplus which will drive down prices.
While Pakistan has a PTA with Indonesia, an FTA is in the works as well. Historically, Pakistan has not fared well with trade agreements but if Pakistan could have a quota for palm oil for Pakistan, local refineries would get a boost but only if imports of refined and finished products were discouraged.

Amidst the rising imports and current deficit crisis, an area for import substitution often overlooked is the edible oil market despite having an over $2 billion bill. Though cultivation of oil seed crops and palm trees might be the way forward in the long run, in the short and medium term the industry needs to focus on value addition.