Indonesia-Iran Preferential Trade Agreement: Unlocking Investment Prospects
Indonesia and Iran signed a preferential trade agreement (PTA) on May 23, 2023, with the aim to increase trade and strengthen diplomatic relations.
Indonesia concluded the signing of a preferential trade agreement (PTA) with Iran on May 23, 2023, with the aim to increase trade revenue and create new investment opportunities between the two countries.
Indonesia will reduce tariffs on Iranian oil, chemical products, pharmaceuticals, metals, and dairy products in exchange for Iran giving Indonesia greater access to export its products like processed food, pharmaceuticals, textiles, palm oil, coffee, and tea.
In 2021, Indonesia’s export revenue to Iran was approximately US$187 million, consisting mostly of edible nuts, palm oil, and motorcycles. Iran exported US$20.4 million worth of goods to Indonesia, consisting of mainly gas turbines, tropical fruits, and petroleum coke.
According to Indonesia’s Ministry of Trade, total trade between the two amounted to US$257 million in 2022 with Indonesia recording a trade surplus of US$200 million.
Following a comprehensive economic partnership agreement (CEPA) that Indonesia signed with the United Arab Emirates in 2021, the Indonesia-Iran PTA is the second trade agreement concluding with a Middle Eastern nation.
Indonesia is eager to expand and diversify its export market such as those in the Middle East, Africa, and South America to reduce an overreliance on traditional trading partners, of whom many have been impacted by a weakening global economy.
Opportunities for investors under the preferential trade agreement
Iran, being located at the heart of West Asia, connects the Middle East, Asia, and European markets. Iran also has large reserves of natural resources, such as oil, natural gas, copper, iron ore, and zine. In addition, Indonesia presents a huge market for Iranian exporters, especially for agricultural products.
Agriculture and livestock
Iran produced approximately 125 million tons of agricultural products per year, of which 8.8 million tons are exports, and the rest is for domestic consumption. This country is ranked one of the leading producers worldwide of agricultural products, such as dates, honey, and pistachio.
Indonesia offers a large market for Iranian agricultural exporters. The archipelagic country imported over US$21 billion worth of agricultural products in 2021, highlighting the country’s burgeoning growth as well as the limitations of the agriculture sector to supply the domestic market.
Indonesia’s livestock needs, particularly for beef, is also another sub sector that Iranian exporters can target. The country imports the majority of live cattle from Australia (more than 620,000 in 2022) and accounts for 63 percent of Australia’s total beef exports.
For Indonesia, Iran offers a new market to export its palm oil. The country saw 33.9 million tons of palm oil exports in 2022, making it the world’s largest exporter of the commodity.
Indonesia will reduce tariffs for Iranian oil. According to Organization of the Petroleum Exporting Countries (OPEC), Iranian-proven crude oil reserves totaled 209 billion barrels, making it the third largest oil in the world.
Indonesia’s oil fields have been in a state of decline due to aging oil fields coupled with a lack of investments in exploration and production. The country imports the equivalent of 400,000 barrels of oil per day, making it the 19th largest importer of refined petroleum in the world.
Iran can also use its expertise in crude oil refining. Indonesia plans to end fuel imports by 2026 by boosting its refinement capabilities and is targeting production of 87.4 million kilo liters of fuel by that year. Domestic consumption in 2026 is expected to reach 85 million kilo liters.
Indonesia is the largest pharmaceutical market in Southeast Asia and is expected to expand to over US$11 billion in 2025 from US$7.6 billion in 2020. The chemical and pharmaceutical industry saw US$4.5 billion in foreign investment in 2022.
Demand for pharmaceutical products and healthcare, in general, is increasing in Indonesia mainly due to a rapidly growing consumer class and better access to healthcare facilities. The country has the world’s largest free healthcare program with some 246 million participants.
As such, given the market size, urban lifestyles, and increasing government spending, the pharmaceutical industry presents a lucrative investment opportunity for Iranian healthcare companies.
According to the Due Diligence Helpdesk on EU Sanctions, international sanctions has evolved Iran’s pharmaceutical industry from being a 100 percent net importer of its pharmaceutical needs to manufacturing more than 60 percent of its products domestically. As such, its manufacturing capabilities can be converted to exports to meet Indonesia’s requirements for pharmaceutical products.
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