For the country's oil supply monopoly, Nepal Oil Corporation, the price of fuel was never a problem as long as it made profits and gave out bonuses to its employees.

It never really worried about fuel adulteration, amidst widespread perception that corporation employees benefited from diluting diesel with subsidised kerosene. It just had to make sure the prices were not lower than India so Nepali fuel wasn't smuggled across the border.

But things have never been this bad, with the doubling of the price of crude in the international market over the past two years. The profits have gone, the corporation is borrowing from banks from month-to-month and there is a real danger it will go broke.

In the past four months alone, a barrel of oil has shot up from $30 to $50. India, which imports 70 percent of its fuel, raised prices two months ago. Since then, there was such a price differential that diesel and petrol was being smuggled south in large quantities and even Indian airliners were flying in empty and tanking up in Kathmandu.

As a result, NOC was losing Rs 580 millin a month. It has borrowed Rs 2 billion from Rastriya Banijya Bank and Standard Chartered Bank this month to tide over the deficit. "We are looking for another creditor to make payments to international oil supplies for next month," NOC officiating managing director, Hariom D Joshi told us. (See interview).

This government finally announced a rise in fuel prices, but doesn't go far enough to reduce the corporation's losses-it will still be losing Rs 406 million a month. The question now is how long the banks will keep on bailing out NOC when there is no immediate prospect of it being able to pay them back.

Nepal's international creditors like the International Monetary Fund and the World Bank have been pushing to end NOC's monopoly and allow private entities to import oil. They say they are propping the government up with budgetary support for oil subsidies which are benefitting Indian consumers.

"The irony is that people across the southern border are benefitting because of the subsidies that have triggered cross-border oil smuggling," says Sukhwinder Singh of the IMF Kathmandu office. "Even within the country, the subsidies in kerosene and other fuel products are not largely reaching the poor and are predominantly benefitting industrialists or the middle class."

NOC officials told us privately that only 30 percent of the kerosene imported into Nepal is actually used by the poor. Most of the rest goes to adulterate diesel and petrol.

Even with the price rise in Nepal, there is still a difference of Rs 6 between the price of petrol in Raxaul and Birganj on the border. Diesel is available for Rs 41.5 in India, while in Nepal it is only Rs 31. Kerosene costs Rs 24 in Nepal and 14 rupees more in India.

What the NOC needs to do, experts say, is immediately remove the differential between the kerosene and diesel prices to reduce adulteration, and bring Nepali prices on par with India to stop smuggling.

NOC officials admit pricing can be instrumental in checking adulteration and smuggling, but say it is too politically sensitive to raise prices so drastically. Earlier this year, gas station owners closed down their pumps for a week when the government tried to check adulteration by banning the sale of kerosene and diesel from the same station. The government had to retract its decision and left the issue unresolved by forming a fact-finding committee.

"If the prices of kerosene and diesel are brought closer, it will automatically check adulteration," admits Commerce Secretary Dinesh Chandra Pyakurel. "But the problem is we can't raise the price of kerosene up to the level of diesel because so many poorer households depend on it."

Privatising the oil sector would take care of that problem. Under pressure from the World Bank and the IMF, the government has declared through its budget policy that it will open oil distribution to the private sector.

A rise in kerosene prices could fuel political unrest, but experts say this can be minimised by talking to political parties not in the coalition. The UML, for instance, has reined in its student wing, which had joined the NC street protests against the fuel price hike. "As long as you don't mix politics with oil, it can be handled," said one official.

It's not just bailing out NOC that is the issue here. The government knows that ultimately it will have to pay the banks if the NOC can't. The government is now looking at private distribution in LPG to minus losses due to subsidies. "Within five months we are allowing companies with paid up capital of Rs 1 billion to start distributing LP gas," Pyakurel told us. After that, it is only a matter of time before the private sector gets into diesel and petrol as well.

For now, the government says it has told NOC to adjust prices in line with the international market and India so that the corporation is able to meet the deficit. But for that to happen, the government has to make sure the public discontent does not spill out onto the streets.