Nepali Times
Up against the wall


BACK IN LINE: As petrol supplies dwindle the queues have started again.
After the NOC warned of an acute fuel shortage this week, the government promised a loan of Rs 1 billion to help it import fuel. Officials say this will ease the situation for about 15 days.

The NOC has to have at least Rs 85 million cash in hand per day to purchase enough petrol to meet Nepal's demand, which has been increasing at a rate of ten percent every year.

The corporation has already borrowed Rs 7.30 billion from the government. It has also taken loans worth Rs 2.15 billion from commercial banks, and Rs 2.54 billion from the Citizen Investment Trust and Employees Provident Fund. It currently owes Rs 2.45 billion to the Indian Oil Corporation, its sole supplier, and has cumulative dues of Rs 14.44 billion.

Nepal's current fuel prices were set when the international price of oil was US$ 83 per barrel. But over recent months oil prices have rocketed, reaching a record high of $135 per barrel this week.

The NOC has not increased oil prices in Nepal in accordance with this rise, and is currently losing Rs 1.78 billion per month supplying subsidised petrol. This adds up to Rs 20 billion a year at the current rate of loss. Given that the annual education budget is Rs 28 billion and health Rs 12 billion, it is extremely unlikely that the government can cover the shortfall.

The subsidised fuel prices are a crowd pleaser, but if continued they will most likely direct public expenditure away from other uses, reduce revenues from domestic production, and contribute to unsustainable budget deficits.

"Oil importers control the prices of petroleum products to protect lower-income citizens," says Digambar Jha, managing director of the NOC.

But evidence suggests that much of the benefit from fuel subsidies goes to relatively well-off people, who consume many times more petrol, diesel and liquid petroleum gas per capita than poorer citizens, and twice as much kerosene.

Removing the subsidy on fuel would both directly affect the price of petroleum products, and have a knock-on effect on the prices of other goods and services that use petroleum products as inputs, including transport.

According to Jha, the NOC has an action plan to resolve the current fuel crisis. He has proposed duel price for diesel and LPG, and kerosene subsidies for the poor and students. "We are also open to the coming of private suppliers, which will be an opportunity for us to prove our competence," he says.

The NOC has also proposed increasing the price of kerosene to that of diesel to avoid adulteration. Officials admit that diesel is adulterated with kerosene, which is tax-free and subsidised. "Kerosene mixed with up to 40 percent diesel is not easily detectable," said an official.

Mukunda Prasad Dhungel, joint secretary at the corporation, says they have proposed an automatic mechanism for price adjustments. "It will depoliticise decision making," he says, as currently political parties do not want to increase prices for fear of protests.

Dhungel says price adjustment would reduce offences like black market sales, cross border smuggling, fuel adulteration and corruption, and bring a smoother supply of fuel products. "Removing fuel subsidies will not generate extra revenue but at least it will reduce NOC losses," he says.

To protect the poor and avoid large protests, the removal of subsidies will have to be accompanied by well-targeted social assistance measures. And maybe by an information campaign to make people understand that Nepal is no more immune to rising petrol prices than the rest of the world.

(11 JAN 2013 - 17 JAN 2013)