The down turn of ‘Unwelcomed Commodity’: The fate of Nepal’s palm oil exports

ManishaGadtaula and Aayush Raj Arjyal

Palm Oil is in everything from food to soap to detergent to everything. The history of Palm Oilcan is traced to almost 5000 years back where it originated in West Africa. Ubiquitous in West Africa, Palm Oil was the primary export of the region. Its usage was initially limited however after the British Industrial revolution and Expansion of Overseas Trade, Palm Oil’s demand started to rise. Britain slashed tariffs on Palm Oil and encouraged African states to produce it. By 1870, Palm Oil was the primary export of African Countries.

High on nutrients, cheap, ranging industrial usage, and source of bioenergy were some of the prominent reasons behind the rising increase in demand for Palm Oil. Britain’s firm, William Lever eyed Europe’s colonies in South Africa for larger quantities of Palm Oil. However, since producing oil by hand was profitable for the Africans, they refused to provide land for foreign firms for mass production. This was the very reason the foreign firms started viewing Southeast Asian nations as a prospective venue for producing large quantities of Palm Oil. The firms not only created a brand new plantation base but also gave unlimited access to these companies for the use of land. The resource which originated in the plains of Africa thus found a new locale in Southeast Asia. Particularly Malaysia and Indonesia are the top producers of Palm Oil production today accounting for 85 %of total global Palm Oil production. More than 20 million hectares of land are already covered with Palm Oil plantations in Indonesia and Malaysia, in some parts of Africa and Latin America that equates to five times more than the area of Switzerland. (WWF). As of 2020/21, the global production of Palm Oil was around 72.27 million metric tons (statista) and currently sells for 975 USD per metric ton and is expected to increase to 1009 USD per metric ton in 2025, an exhibiting sign that the demand of Palm Oil is yet to increase in coming years. The rationale for southeast countries opting for this cash crop is that palm trees produce more oil per hectare of land than any other oil-producing crop, require less energy as well as fewer fertilizers and pesticides than alternatives making it cheaper than other crops.

Under South Asian Free Trade Area (SAFTA),the agreement provisions zero tariffs on goods exported from underdeveloped countries like Nepal.Sighting its increasing demand in the international market for its widespread use, Nepalese exporters were lured by the profit they could make from export of Palm Oil.  Nepali traders started importing crude Palm Oil from  other countries paying minimum tariffs and then exported the finished product to India paying zero tariff.Nepal exportedPalm Oil only from few years back but did not produce an ounce of the oil by itself. It  imported crude Palm Oil from Indonesia, Malaysia and Argentina, refined it and exported it to India. In 2019/20 Nepal exported Palm Oil worth Rs.18.31 billion to India, making the product the topmost in the country’s export lists.However in a surprising move, a year ago India imposed a ban on import of Palm Oil citing low quality and not meeting value addition by Nepalese Exporters. The rationale cited by India behind this ban was that Nepalese exporters scorned the Rules of Origin (ROO) and Value Addition with impunity. The ROO requires that the product must have at least 40% value addition as percentage of FOB Value in order to enjoy the preference. However, for LDCs, the required value addition is 30%. While Nepali exporters claimed that they had ensured value addition of 32-33%, and complied to special treatment obtained by the Least Developed Countries it cannot be assumed that Nepal had intentionally disregarded the rule of origin of SAFTA. The ban was then lifted by the Directorate General of Foreign Trade after a year effective from 1st July 2021. This move has upturned the profit-making motive of NepalesePalm Oil exporters experienced through the trade difference even though Palm Oil exports are now open. The refinery traders who were carried away by arbitrage are now on the brink of losing huge investments all thanks to India lowering import tariffs on Palm Oil.  It is to be noted, however, that such sanctions/ ban doesn’t shouldn’t come as a surprise for Nepalese traders as the south neighboring country has time and again troubled Nepalese exports with  restrictions on commodities like ginger, cardamom, betel nuts, etc

(Rs. in million)

Source: NRB, Current Macroeconomic and Financial Situation(based on two months data)

Whilst in the Fiscal Year 2019/20 (annually) Palm Oil seem to have an upper hand as compared to Soyabean Oil, the former’s export value dipped to 1 million in the year 2020/21 primarily due to sanction imposed by India on Nepali exporters. According to Nepal Foreign Trade Statistics published by the Department of Customs, the export value of Palm Oil was worth Rs 18.32 billion making it the top export in the fiscal year 2019/20. This was followed by soyabean oil with an export value of Rs.12.69 in the same period. However, the decision by the Indian Government to put a ban on refined Palm Oil saw a downturn in export value. As India lifted the ban temporarily, there was some sort of relief for Nepalese Palm Oil refiners.

There exist some discrepancies in the context of the actual number of refineries established in Nepal for Palm Oil production as well. While some data exhibit the establishment of 19/20 refineries for Palm Oil, the exact number of such refineries and the investment made in the sector is still not approximate. Similarly, authentic data on a number of employment generated in the process of exporting Palm Oil couldn’t be traced out. One of the main drawbacks of Palm Oil export was that the export was narrowed down only to the Indian market when Nepal had the potential to explore other markets as well which it did not bother to. Although India still remains the biggest trading partner of Nepal, limiting the export just to one country seems rather an infant move. The repercussions of this extreme dependency was felt after the ban was announced from sinking investment to lost employment to lowered trade revenue directly hitting the aggregate demand. It can also not be denied that Nepal too has its own set of absurdity as it lacks to provide at least an estimated figure (the exact amount of investment, employment generated, multiplier figure, and so on) on any other data except the usual regarding the Palm Oil for policy purposes. It demonstrates the absence of proactiveness and naivety of Nepalese policymakers. And now after the strategic move has already been experienced by India by lowering its import tariffs, Nepal’s export of refined Palm Oils are on the verge of sinking and so is the investment employment and export revenue generated by this sector. It can thus be deduced that Nepal’s Palm Oil exports do not anymore depend on how cheap the crude oil is or how big the trade difference is, rather it seems to depend on India’s strategic trade moves. And being the de facto market for Nepal’s oil exports, it sure has an upper hand unless Nepal diversifies its market beyond India to other SAARC Nations.

Likewise, the export of Soybean Oil to India is on the same path, and Nepal as usual seems to be rather dogmatic in her actions and not learning from past mistakes. Soybean constitute 37% of the share in exports made by Nepal while Palm Oil contributed 17 % (see table). When summed, soybean oil and Palm Oil contribute 54% of Nepalese exports. More than 50% of Nepal’s export is based on unsustainable products that have no market beyond India. The export of Palm Oil turned out to be a momentary move that helped to reduce the trade deficit but only for the short run. In the long run, the export is unsustainable since this export is possible only because of trade differences. Although India has lifted the ban on Palm Oil, we cannot rule out the fact that the rule of origin might get placed again in soybean oil. In that case, Nepal again will have only an option left and that is to request for a lift in the ban.

Conclusion

Dependence on remittance income and some windfall gains through the export of Palm Oil and soyabean oil cannot be sustainable in the long run. For many years the tendency of Nepalese trade has been exporting raw materials and importing high-value final consumer products from its trading partners forming a negative balance of payment. Given the ballooning trade deficit, government’s lackluster in capital expenditure, government’s negligence as such Palm Oil is not produced in Nepal the refining industries neither contribute to economies of scale nor does it contribute to sustainable economic growth and forestalling appropriate policies beforehand, unfavorable business environment, poor economic diplomacy, etc have had an adverse impact in the economy. The shrinking economic indicators do not seem to bother the government.  To attain the status of a middle-income country by 2087 BS along with 10.3 % of economic growth as stated in the 15^th periodic plan (2076/77-2080/81) simply depending on the export value of edible oil would be a far outcry. So, it’s high time that Nepalese policymakers give due thought as to how to make the exports sustainable utilizing local resources rather than importing raw materials and refining it and also then letting exporters flaunt the arbitrage.  It’s bizarre that we do not use resources available at our doorsteps instead opt to import the raw materials and then export them after some processing.

(The writer duo have pursued Masters Degree in Economics and frequently writes on economic issues. )