American Indonesian Chamber of Commerce


Reforming the Sembako Economy

February 2022

Reforming the Sembako Economy

Although Indonesia actively courts an image of a modernizing economy interested to develop high technologies, such as the electric vehicles, contrasting narratives often occur reminding us that the nation’s underpinning as well as the core interests of its people remain the sembako (9 basic daily necessities): rice, salt, sugar, fuel, cooking oil, meat, eggs, milk,and flour. So, in the same week that one of the world’s premier manufacturers of high tech products, Foxconn, announced a massive $8 billion investment to produce electric cars components, electric batteries, electric motors and relocate its telecommunications spare part manufacturing facilities from China to the Batang integrated industrial area in Central Java, the Indonesian government had to engage in serious triage to handle a major spike in cooking oil prices. Similarly, electricity prices were set to rise significantly due to a coal shortage, needed by many of Indonesia’s power plants, and the government had to step in and ban coal exports. If I am President Jokowi, my heart is with the Foxconn investment, but my head is wrapped around the sembako. Those products must be affordable for the 65% of the population that lives week to week on wages from informal employment. Many in this group have now been connected to government assistance programs through mobile banking and inexpensive handsets, however, the government’s control over sembako pricing can be limited or worse yet, distorted.

In the latter part of 2021 world market prices for crude palm oil (CPO) rose reflecting production cutbacks due to COVID in Malaysia and Indonesia. Similar reductions occurred in canola oil (Canada, Argentina) and sunflower oil (Russia). Furthermore, the government created a biodiesel with 30% palm oil. With high demand for CPO abroad, shortages occurred domestically. Corresponding hikes in cooking oil prices prompted the Indonesian government to step in. In November 2021 the Trade Ministry’s first move was to offer to pay cooking oil producers to produce a certain quantity at a maximum domestic price well below international prices. As export prices rose, it was clear the policy would fail as the Ministry’s subsidy fund was insufficient. Indonesia’s police (charged with monitoring inflation) also warned of possible corruption in the subsidy program. Last month the Ministry shifted its policy again. Under threat of losing their export licenses, CPO producers were required to sell 20% of their production locally at a fixed price the Ministry believed would allow for a profit. A week into implementation buyers still line up for hours for limited supplies. Some well known brands have disappeared from supermarkets, Companies are rumored to be withholding supply. The government’s check price may not be sufficient amid fluctuating world prices. Muhammad Lutfi, Indonesia’s Trade Ministry, became so frustrated he recently said: “This is like chasing a shadow”.

A similar awkward situation occurred with coal. Although its not a sembako, its use as a fuel for electricity generation greatly effects their prices. Right at the end of 2021 the government invoked a one month ban on exporting coal due to dwindling supplies at Indonesia’s power plants. The government’s argument was that producers were not meeting their 25% domestic obligation, implemented through a August 2021 regulation. Similar to the cooking oil shortage, the root of the coal shortage problem is, predictably, a big difference between what PLN, a state monopoly, is required to pay for coal and international prices. In January the difference was over $100 a ton. By the end of January, the coal shortage abated, but not without damage to Indonesia’s trade partners and coal sector investors who may well wonder how reliable the Indonesian government is.

Indonesia subsidizes the sembako as part of its poverty reduction program. Every one of its governments does this for political purposes and I can’t think of a party that fundamentally opposes them. President Jokowi seemed to be an outlier in 2014 when he moved quickly after his election, against his party’s interests, to eliminate energy subsidies. But with COVID they have returned. The use of domestic obligations, check prices, and temporary export bans, promotes corruption and smuggling. They also negatively affect the financial stability of state-owned companies such as PLN. Often the biggest beneficiaries are the middle class and well-connected businessmen. Better use of vouchers for those in need — perhaps distributed via mobile phones–would allow state-owned institutions to pay market prices as well as help the private sector minimize the supply and demand distortions that inevitably arise. But the political realities of elections, the next one is only 2 years away, makes this very difficult. Subsidizing the sembako should not be an accepted cost of doing business. President Jokowi has had the courage to build large scale infrastructure projects whose benefits won’t be felt until he is out of office. He could apply the same visionary leadership and creativity to reforming the sembako, matching the modernizations in the fields such as electric batteries and digital technology.