Monday, 27 July 2009

Suspension of L/C Obligations Expected to Ease Export Procedures of Coffee

The Association of Indonesian Coffee Exporters [AEKI] welcomed the Government’s policy to suspend Rule of L/C obligation of coffee exports which was originally planned for April 1, 2009 to August 31, 2009. This postponement was expected to smoothen export of coffee which once happened to be stagnant since overseas buyers were waiting for the execution of the rule. In the period of suspension it would be most advisable that the Government thoroughly prepared technical matters like arranging bank correspondence of the National Foreign Reserves Bank.

Rachim Kartabarata, Executive Secretary of AEKI in an interview with Business News stated that export coffee at the value of under USD 1 million was not obliged to use L/C, but was still mandatory to report. This rule would be reviewed by end of September 2009. To export Arabika coffee at the value of USD 1, at least 2 to 3 containers would be needed, whilst for exporting the Rubusta coffee from Lampung with the transaction value up to USD 1 million, more containers would be needed.

The rule of L/C obligation for coffee export was considered inappropriate under the present adverse condition. Most local foreign reserve banks still had no strong linkages with overseas international banks in the export destination states. The domestic bank only liquidated the L/C issued by the corresponding bank overseas. During the global financial crisis, many banks crumbled. In addition to that, the problem was scarcity of bank correspondence at the destination states of coffee export, whilst overseas branch office of local banks were too few.

In addition to that, the policy of L/C obligation arose suspicion among buyers against exporters, because the business built upon trust would be disturb by binding rules which put overseas buyer in difficult position. Payment by L/C had long been abandoned by coffee exporters due it its high cost. If L/C obligations were to be put in effect, small coffee exporters would have to face problem, since they were accustomed to penetrate the export market without using L/C which means that small exporter might loose their competitive edge against big exporter who were mostly foreign companies [PMA].

L/C obligation would create extra cost, i.e. for opening the L/C or liquidating the L/C through Banks-this implied that the extra cost would burdened on the farmers, resulting in the reduction of farmers income all in all, the L/C obligation did not offer any plus point to neither exporters nor formers but one thing was sure it would weaken local exporters of coffee exporters of coffee overseas.
Suspension of L/C obligation, while being applied on coffee export, was also applied on cacao and rubber. The reason of postponement was because the downturn of export performance input from the parties concerned and the difficulties of small exporters to meet L/C requirements. On the other hand, the external condition was a lot worse than predicted. The advanced states were having recession and the volume of world’s trade was contracting.

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