News headlines: Pakistan Prime Minister Imran Khan said that Pakistan will buy more palm oil from Malaysia after demands from India reduced for Malaysian palm oil. However how much more remains unanswered for now. Image source: Reuters
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Whilst we are pre-occupied with the development of the coronavirus from China, we should also be aware of the impact on economy relating to the cities lock down, travel banned and low productivity in China and other countries. After all, when China sneezes, trading countries with China will also be hit badly – Singapore will be worse. Malaysia on the other hand can probably weather the impact slightly better due to higher manufacturing export and the abundance of natural resources but still get hit nonetheless.
No thanks to Dr M’s standing firmly on his statement on India & Kashmir has now caused serious consequences both at diplomatic level with India and also on the import of palm oil into the country. We often underestimated the feelings of the Indians when it comes to issues of foreigners putting their hands into their domestic matters. Didn’t we did see enough Bollywood movies to see how passionate the Indians can be?
Even before the trade restrictions, the Indian government had in October last year informally asked edible oil importers not to buy Malaysian palm oil in any form, an industry executive said. “Palm oil imports from Malaysia have been declining drastically since then,” he told China Dialogue. “All importers have been replacing Malaysian palm oil imports by buying more from Indonesia,” he said, declining to be named.
Malaysia’s palm oil shipments to India have indeed seen a precipitous fall in the past couple of months, according to data released by the Malaysian Palm Oil Board. This decline could have severe repercussions in the Southeast Asian country, as exports of palm oil to India had surged in recent times.
Now Pakistan Prime Minister, probably trying to salvage his snub to Dr M’s invitation for the KL Summit now coming in and saying that Pakistan will buy more palm oil in place of India. That is so kind of him but then again, the question remains – do Pakistan has enough cash to buy more palm oil from Malaysia and whether there is a real demand in Pakistan for Malaysian palm oil?
According to the Malaysian Palm Oil Council, Pakistan bought 1.1 million tonnes of palm oil from Malaysia last year.
On whether Pakistan could actually afford to buy more palm oil from Malaysia, Kok said the matter could be ironed out through negotiations between the two countries.
“There will always be a demand for palm oil and fats. What both countries need to do now is to sit down and iron out issues under the name of bilateral trade,” she said.
Kok said this in response to reports which quoted economists saying that Malaysia should not expect too much from Pakistan’s pledge to buy more palm oil due to the latter’s lack of money and weak internal demand.
In other words, the Minister does not know if Pakistan can actually pay for the palm oil or they can increase their demand for palm oil in the coming weeks. The fact is it is going to be a long due process before the actual export of the additional palm oil actually happens. Of course to calm the storm that brewing on the horizon, the Minister throws in some notion that it is workable provided both countries sit down and iron out the various teething issues.
It is not going to work and even the experts think it is not going to work:-
Nazari Ismail, from the Business and Accounts faculty of Universiti Malaya, said the gesture by Khan sounded strange and that it might just be “to please Prime Minister Dr Mahathir Mohamad”.
“Food is not something that you can increase easily. You cannot ask all Pakistanis to increase their consumption of capatis or creamers or other food that use palm oil to help Malaysia boost its export of palm oil,” he told FMT.
Analyst Sathia Varqa said even if Pakistan honoured its commitment to increase palm oil imports from Malaysia, it would not be enough to fill the void left by the Indian market. Sathia, who runs Singapore-based Palm Oil Analytics, said in that 2019, Pakistan bought 1.08 million tonnes of palm oil from Malaysia, while India bought 4.40 million tonnes.
“Pakistan will need to buy an additional 3.309 million tonnes to fully compensate for the loss,” he said.
Such a dramatic increase, he said, was unlikely as Pakistan’s market was much smaller than India’s and as such did not require that much edible oil.
Independent economist Hoo Ke Peng said Pakistan was the third largest palm oil importer from Malaysia but that it might not have the means to buy additional palm oil.
“They want to buy but they do not have the money,” he told FMT, referring to Pakistan’s total 2019 external debt and liabilities of US$106.9 billion in the first quarter, as the country continues to borrow more, mainly from the International Monetary Fund (IMF), to improve its international payment capacity.
Pakistan’s national budget for 2019-2020 which saw a deficit of almost USD20 billion. Minister of State for Revenue Hammad Azhar made this point when presenting the budget:-
“…the government would continue import compression and try to increase exports to reduce external deficit to $6.5bn next year from $13bn during the outgoing fiscal year. This would be achieved by supporting exports through revised duty structure on raw material and intermediate goods, improved tax refunds, competitive electricity and gas rates and redoing free trade agreements”
Pakistan needs to reduce it’s imports and boost it’s exports – so why they want to increase import of palm oil now?
Further Pakistan spends 57% of the revenue on defence (16%) and debt servicing (41%) whilst Malaysia spends 11.9% on defence (1.9%) and debt servicing (10%). In other words, Pakistan has different priorities when it comes to spending and they are short by USD20 billions short to cover their expenses. Buying more palm oil for the country to save Malaysia is not in their top of the list to do.
Historically, Pakistan had always remained 3rd largest importer of Malaysian palm oil – 1.16 million tonnes in 2018 to 1.09 million tonnes in 2019 (reduction in 2019). China is the 2nd largest importer of Malaysian palm oil – 1.86 million tonnes in 2018 to 2.49 million tonnes in 2019. India is the largest importer of Malaysian palm oil – 2.51 million tonnes in 2018 to 4.41 million tonnes in 2019 (substantial increase in 2019). Data source: Malaysian Palm Oil Board.
Even Pakistan increases the consumption of palm oil to help Malaysia, there is no way they can make the number that India is consuming annually.
But let’s say Imran Khan managed to pull all strings and miracles happens, Pakistan need to boost import of Malaysian palm oil by another 3.4 million tonnes to match the Indians. This alone amounts to almost RM3 billion in the current market price. This may be possible if Pakistan reduces it’s huge defence budget. The next question would be where this additional palm oil is going to go?
So, as such as we welcome Pakistan Prime Minister’s promise to buy more palm oil from Malaysia, it is unrealistic to expect they can replace India for the import of the palm oil within a short time. Instead, it is better for Malaysia to eat the humble pie and apologise to India on what have been said and done. And then work with the Indians to sustain the palm oil imports.
No one likes other country to interfere with their domestic politics and decisions including Malaysia.
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