A monopsony is a simple economic theory that dictates that a large buyer controls a big chunk of the market and thus has bargaining power. At over $2 billion imports, Pakistan is the third largest importer of refined palm oil in the world and has a degree of monopsonistic power.
To bring into context the consumption of palm oil in Pakistan, consider this: palm oil is the primary ingredient used to make ghee. While cooking oil consumption is increasing over time, 1.3 million tons of ghee was produced in FY18 as compared to 400,000 tons of cooking oil.
Pakistan was already importing about $1 billion worth of palm oil from Malaysia when the two countries signed the free trade agreement which came in effect in 2008. Till 2013, Pakistan continued to import palm oil while exporting little in return as the highest potential for export items were either not part of the concession list or Pakistan’s competitors enjoyed better rates. In 2013, Pakistan again did not leverage its buying power when it signed a PTA with Indonesia which allowed the country to become the main supplier of palm oil. As a result, the combined trade deficit with Indonesia and Malaysia stands at about $1.5 billion.
It may have taken the policy makers half a decade to realize Pakistan’s purchasing power but the threat has finally been issued that Pakistan will terminate the PTA if Indonesia does not ratify the trade deal. If the PTA is terminated, market would skew back to Malaysian palm oil.
Given the interwoven nature of Malaysia, Indonesia, and Singapore’s palm oil business (read “Global politics of palm oil” published on October 30, 2018), the threat is less ominous than it seems. However, since the Malaysian investment in Indonesia is at the private investor level, the government would not want to lose one of its biggest markets. Though details of the trade deal have not surfaced, one hopes that concession list incorporates higher value goods than kinnows which are usually associated with Malaysia and Indonesia. Since palm oil is $650 a ton whereas kinnows are not even $50 per ton, the trade deficit will need to be plugged in by higher value goods such as rice which is valued roughly at $400 per ton.
Another important element of the trade deal should be an allowance for imports of crude palm oil. In order to promote value addition of its indigenous product, Indonesia offers subsidies to traders that export refined palm oil. Though Pakistan has significant capacity to refine crude oil, refineries remain idle because of Indonesia incentivizing RBD palm oil exports.
India on the other hand imports nearly $5 billion worth of CPO from Indonesia as compared $2 billion of RBD oil. This not only makes sense economically but from a health point of view as well. Imported refined palm oil spends long stretches of time in pipelines which deteriorates its quality. Locally, some companies sell it without further processing which is detrimental to health. If it was processed locally, the quality would improve which given the recent brouhaha on trans-fat has become an important issue of late.
The crux of the matter is that Pakistan needs to flex its muscles to promote its exports with Malaysia and Indonesia. Using its monoposonistic power, it can obtain a quota of CPO imports and give the local edible sector a boost which would also bring down the numbers of RBD palm oil imports.