PALM OIL ECONOMY IN THE INDONESIAN ECONOMY

TLDR

Indonesia’s palm oil economy is far bigger than its plantations. As an integrated cluster of upstream, plantation, downstream, and service industries, it contributed 16.22% of national output and 13.75% of GDP in 2020, and its foreign exchange earnings grew 240% from 2015 to 2025, turning Indonesia’s trade balance from a deficit into a growing surplus.

Introduction

Indonesia has long been known as the world’s largest producer and exporter of palm oil since 2006. Likewise, the fact that the palm oil industry is one of the strategic industries in the national economy has often been stated by national palm oil industry players, the government, and some members of the general public. However, how large the palm oil economy is within Indonesia’s economy has rarely, or even not yet, been revealed.

In various discussions or forums, the palm oil industry is often understood only as oil palm plantations. This understanding sees only part of the palm oil industry. Initially, the palm oil industry did indeed begin with oil palm plantations. However, further development of oil palm plantations gave rise to and developed the upstream palm oil industry, which produces capital goods for oil palm plantations and is integrated in input-output terms with oil palm plantations (backward integrative growth). Not only that, the growth of oil palm plantations has also encouraged the development of downstream palm oil industry that process the products of oil palm plantations and are integrated with oil palm plantations (forward integrative growth). And the development of the upstream industry, oil palm plantations, and downstream industry has also attracted the development of the service-providing industry (co-integrative growth). 

Thus, the palm oil industry has developed into an industrial/economic cluster consisting of the upstream palm oil industry, oil palm plantations, the downstream palm oil industry, as well as service-providing industry and institutions. Therefore, to measure the palm oil economy in the national economy, it is not sufficient to measure only the contribution of oil palm plantations, but rather it must include this economic cluster.

This article presents and discusses the contribution of the palm oil economy to Indonesia’s economy, particularly in terms of output, value added, and Indonesia’s trade balance. The discussion of the contribution of the palm oil economy to national output and value added is based on the 2020 Input-Output Table published by the Statistics Indonesia (Central Statistics Agency/BPS, 2025a).

CONTRIBUTION TO NATIONAL GDP

In reality, what we call the palm oil industry or palm oil economy is much larger than oil palm plantations. It includes all industries that produce and provide capital goods (inputs) for oil palm plantations (upstream palm oil industry), industries that process products of oil palm plantations into intermediate products or finished products (downstream palm oil industry), as well as industrial activities and institutions that produce services used by the upstream palm oil industry, oil palm plantations, and downstream palm oil industry. Such a scope of the palm oil economy is also called the palm oil agribusiness system (Figure 1).

The rationale underlying the scope of the palm oil economy or palm oil agribusiness system is the input-output relationship. Upstream industry, such as nurseries, fertilizer industries, pesticide industry, and machinery industry, develops because its output becomes an input for oil palm plantations. Downstream palm oil industry (oleofood complex, oleochemical complex, biofuel/bioenergy complex, and biomass–biomaterial complex industries) develops because it uses as its main input the output produced by oil palm plantations. Likewise, service-providing industry and institutions, such as trade, banking, transportation, and others, develop because their output in the form of services is used by the upstream industry, oil palm plantations, and downstream industry. 

Based on Indonesia’s 185-sector 2020 Input-Output Table (BPS, 2025), there are at least 66 sectors directly related to the national palm oil industry through input-output relationships (direct effect). These 66 sectors include industries that use output from the palm oil industry as well as industries whose output is used as input in the palm oil industry. This means that if the palm oil industry grows, it will directly attract the growth of at least 66 national economic sectors. The growth of these 66 sectors will also attract the growth of other economic sectors (indirect effect) in such a way as to drive overall economic growth through the income-induced effect (consumption induced effect).

By making adjustments and reclassification to the statistics of Indonesia’s Input-Output Table, the contribution of the palm oil economy to national economic output and value added can be obtained (Table 1).

Total national economic output in 2020 amounted to Rp 28,700.25 trillion. Of this national output, the contribution of the palm oil economy in the same year reached Rp 4,655.14 trillion, or approximately 16.22 percent of total national output.

The output value of the palm oil economy was contributed by the upstream industry at Rp 246.18 trillion (5.29 percent) and oil palm plantations at Rp 377.27 trillion (8.1 percent). Meanwhile, the downstream industry contributed Rp 3,605.45 trillion (77.45 percent) and service-providing industry approximately Rp 426.24 trillion (9.16 percent). This shows that the largest contributor to palm oil economy output in 2020 was the downstream industry, followed by service-providing industry, oil palm plantations, and the upstream industry. Every one rupiah of output occurring in oil palm plantations will create approximately ten rupiahs of downstream palm oil output.

In the calculation of national income or Gross Domestic Product (GDP), the value-added approach is usually used. The total value added (GDP) of Indonesia’s economy in 2020 amounted to Rp 16,980.29 trillion. Meanwhile, the contribution of the palm oil economy reached approximately Rp 2,334.51 trillion, or about 13.75 percent of national GDP. 

The GDP of the palm oil economy came from the upstream industry at approximately Rp 110.25 trillion (4.72 percent), oil palm plantations at Rp 287.35 trillion (12.31 percent), the downstream industry at approximately Rp 1,640.77 trillion (70.28 percent), and service-providing industry at approximately Rp 296.15 trillion (12.69 percent). The largest contributor to the value added or GDP of the palm oil economy was the downstream industry, followed by oil palm plantations, service-providing industry, and the upstream industry.

It is interesting to note that the largest contributor to output and value added in the palm oil economy in the upstream industry is fertilizer, in the downstream palm oil industry it is the oleofood complex industry, while in service-providing industry it is trade, transportation, and banking (financial services). 

The analysis shows that the contribution of the palm oil economy is quite large to the national economy, both in terms of national output (16.22 percent) and national value added (13.75 percent). For a single type of commodity, this contribution of the palm oil economy is the largest in the national economy. There is no other commodity in the national economy that has been able to contribute that much. The contribution of the palm oil economy is approximately the same as the contribution of the agricultural sector (all agricultural, plantation, livestock, fisheries, and forestry commodities) to national GDP in 2020, namely 13.7 percent (BPS, 2025^b).

Such a contribution shows that the palm oil economy has an important/strategic role in Indonesia’s economy. Products from the palm oil economy are an important part of food security, energy security, and the national trade balance (PASPI Monitor, 2024; PASPI Research Team, 2026).

This contribution of the palm oil economy is based on 2020 data. Indonesia’s 2025 Input-Output Table had not yet been published (when this article was written). It is estimated that the contribution of the palm oil economy in 2025 will be much larger, considering that the development of the palm oil economy during 2020–2025 was relatively better than in the previous period. In the analysis of the 2020 Input-Output Table, palm oil production (CPO+CPKO) was still around 51 million tons in 2020 (GAPKI, 2021; Amalia, 2025), whereas in 2025 it has reached approximately 56.5 million tons (GAPKI, 2026). In addition, more massive downstreaming of palm oil occurred during the 2020–2025 period. The contribution of the mandatory palm oil biodiesel program had not been included in the 2020 Input-Output Table.

PALM OIL ECONOMY IN THE TRADE BALANCE

The importance and size of the contribution of the palm oil economy to the national economy can also be seen from its role in Indonesia’s trade balance (PASPI, 2023). In this context, PASPI developed a new measurement method to examine the contribution of the palm oil economy to the trade balance. 

In general, the contribution of a sector/commodity to the trade balance is measured by how much export earnings (Devisa Hasil Ekspor/DHE) it generates each year. This foreign-exchange indicator is very important in the context of economic development because DHE does not merely add to foreign exchange reserves, but more importantly, foreign exchange is an injection of “fresh blood” (like investment) to increase the volume of “blood” in the economy. 

In addition to export earnings (DHE), another important indicator is foreign-exchange savings for import substitution (Devisa Substitusi Impor/DSI). The use of foreign exchange for imports is a leakage that reduces the “blood” of the economy, so foreign-exchange savings for imports have an effect like an injection. Therefore, DSI obtained from import substitution, such as substitution of fossil diesel imports with palm oil biodiesel, is also an important indicator in examining an industry’s contribution to the trade balance.

The amount of DHE and DSI generated by Indonesia’s palm oil industry and their contribution to the trade balance are presented in Table 2. Palm oil DHE has had a tendency to increase over the last decade. Palm oil DHE in 2015 was still around USD 18.6 billion, then increased to USD 37.07 billion in 2025. Likewise, DSI, as the blending rate in the mandatory biodiesel program (Bxx) increases, will automatically increase DSI. The DSI value increased from around USD 0.29 billion in 2015 to USD 8.08 billion in 2025. Thus, palm oil foreign exchange (DHE and DSI) generated increased from USD 18.89 billion in 2015 to approximately USD 45.15 billion in 2025, or increased by approximately 240 percent in 10 years. This increase in palm oil foreign exchange affected Indonesia’s trade balance through two channels. The DHE channel affects the non-oil and gas trade balance, while the DSI channel affects the oil and gas trade balance. 

Through the DSI channel in 2015, Indonesia’s oil and gas trade balance with DSI experienced a deficit of only USD 5.9 billion, or smaller than the oil and gas deficit without DSI of USD 6.19 billion. Likewise, in Indonesia’s oil and gas trade balance in 2025, DSI made the oil and gas trade balance deficit only USD 19.7 billion, while the oil and gas trade balance deficit without DSI was larger, reaching USD 27.78 billion. This shows that DSI can reduce the oil and gas trade balance deficit.

Through the DHE channel during 2015–2025, Indonesia’s non-oil and gas trade surplus increased from approximately USD 13.6 billion to USD 60.75 billion. Compare this with the condition without DHE, the non-oil and gas trade balance experienced a deficit of USD 5 billion in 2015, and the non-oil and gas trade balance enjoyed only a relatively small surplus of USD 23.68 billion in 2025. This means that the presence of DHE can not only cover the non-oil and gas trade balance deficit, but also create an increasingly larger trade surplus, where the trade surplus was almost 3 times larger than without DHE during the period. 

The net effect of DHE and DSI is on the total goods trade balance. During 2015–2025, with DHE and DSI, the trade balance experienced a surplus that increased from USD 7.7 billion to a surplus of USD 41.05 billion. If there had been no DHE and DSI, the trade balance would have experienced a deficit of USD 11.19 billion in 2015 and USD 4.1 billion in 2025. This means that the presence of palm oil DHE and DSI not only improves the trade balance but has succeeded in reversing Indonesia’s trade balance from a deficit to a large surplus. 

Several studies criticize that if there were no mandatory biodiesel program (meaning DSI was zero), the DHE received by Indonesia would be higher. These studies assume that the world CPO price remains fixed as it was during 2015–2025, so if the volume of palm oil exports increased (by removing the mandatory biodiesel program), higher DHE would be obtained. This view overlooks the importance of the mandatory biodiesel program in influencing world CPO prices (Purba dan Hartoyo, 2010; Joni, et al., 2011; Joni, 2012; PASPI Monitor, 2023^b, 2024^b; Gultom, 2026; PASPI Research Team, 2026). As the world’s largest palm oil producer and exporter (USDA, 2026), the volume of Indonesia’s palm oil exports will affect world CPO prices. With the mandatory biodiesel program, particularly after B20 to B50 (currently), Indonesia’s palm oil export supply has decreased significantly, causing the world market to experience excess demand, which has made world CPO prices increase as has occurred in recent years. Thus, DSI does not reduce DHE, but with DSI (domestic mandatory biodiesel), DHE increases as it does today. 

In addition, there are national interests related to the mandatory biodiesel program, namely building energy security. With mandatory biodiesel from B10 to B50, Indonesia has succeeded in reducing (even eliminating) Indonesia’s dependence on fossil diesel imports (PASPI Research Team, 2026). In addition, the mandatory biodiesel program is also part of the global community’s agenda to reduce emissions from fossil energy consumption (PASPI, 2023; PASPI Monitor, 2023a, 2025; PASPI Research Team, 2026).

Conclusion

The palm oil economy in the national economy is quite large and strategic. In national output, the palm oil economy contributes approximately 16.22 percent of national output. Meanwhile, in national value added (GDP), the contribution of the palm oil economy reaches approximately 13.75 percent. 

The palm oil economy also makes a significant contribution to the national trade balance. The palm oil foreign exchange generated increased from USD 18.89 billion in 2015 to approximately USD 45.15 billion in 2025, or increased by approximately 240 percent in 10 years.

This palm oil foreign exchange consists of palm oil export earnings (DHE), which increased from approximately USD 18.6 billion in 2015 to USD 37.07 billion in 2025, thereby making the non-oil and gas trade balance surplus increasingly larger and continuously increasing. Meanwhile,  foreign-exchange savings for import substitution (DSI), or foreign-exchange savings due to mandatory palm oil biodiesel, increased from approximately USD 0.29 billion in 2015 to USD 8.08 billion in 2025, thereby reducing the oil and gas trade balance deficit. The contribution of palm oil foreign exchange reversed Indonesia’s trade balance from a deficit to an increasingly larger and continuously increasing trade balance surplus.

Acknowledgment

“The author extends sincere gratitude for the financial support provided by the Plantation Fund Management Agency (Badan Pengelola Dana Perkebunan) in the preparation of this popular scientific article as part of an advocacy at countering negative campaigns against palm oil.”