US embassy cable - 05KATHMANDU2210

C O N F I D E N T I A L SECTION 01 OF 02 KATHMANDU 002210 
 
SIPDIS 
 
DEPT FOR EB/ESC/IEC AND SA/INS 
 
E.O. 12958: DECL: 10/07/2015 
TAGS: EPET, ENRG, ECON, ETRD, EFIN, PGOV, PREL, NP 
SUBJECT: NEPAL FACES LOOMING CRISIS IN PETROLEUM SUPPLY 
 
REF: A. KATHMANDU 01818 
 
     B. KATHMANDU 00374 
     C. KATHMANDU 00070 
 
Classified By: Ambassador James F. Moriarty; Reasons 1.4 (b/d). 
 
SUMMARY 
------- 
 
1.  (SBU) The state-owned monopoly oil importer, the Nepal 
Oil Corporation (NOC), is experiencing a serious financial 
crisis.  Unable to collect payment of the balance owed by 
NOC, the NOC's supplier, Indian Oil Corporation (IOC), has 
threatened to stop providing petroleum products to Nepal. 
The Ministry of Finance and the central bank of Nepal came to 
NOC's rescue in September after commercial banks refused to 
pledge any fresh loans to NOC, despite requests from 
Assistant Finance Minister Roop Jyoti.  Because the 
government continues to subsidize the price of petroleum 
products in Nepal, the NOC incurs a loss of roughly USD 7 to 
10 million every month.  NOC reportedly lost more than USD 
112 million in the last year.  Experts in government and 
civil society believe that His Majesty's Government of Nepal 
(HMGN) must develop a market-based pricing mechanism and 
remove subsidies to solve the problem.  END SUMMARY. 
 
NEPAL OIL CORPORATION IN DIRE FINANCIAL CRISIS 
--------------------------------------------- - 
 
2.  (SBU) The state-owned monopoly oil importer NOC is 
experiencing a serious financial crisis due to the huge 
monthly losses it incurs as a result of selling petroleum 
products at a subsidized price.  Upon failing to collect 
payment of USD 31.34 million from NOC for the month of 
September, Nepal's supplier, IOC, threatened to stop 
providing petroleum products to Nepal.  The Ministry of 
Finance (MOF) and Nepal Rastra Bank (NRB), the central bank 
of Nepal, bailed out NOC at the eleventh hour by lending the 
equivalent of USD 17.5 million from the government's coffers, 
and requesting two commercial banks to lend the balance to 
settle NOC's bill.  MOF's intervention resolved the immediate 
financial crunch faced by NOC and averted a petroleum supply 
crisis, but NOC is still not out of the woods.  The NOC 
continues to lose millions of rupees every day under the 
current pricing mechanism. 
 
3.  (SBU) Rameshwor Khanal, Joint Secretary, MOF told EmbOff 
that MOF came to NOC's rescue after most commercial banks 
refused to pledge any new loans to NOC, despite requests from 
Assistant Finance Minister Roop Jyoti.  Umesh Prasad Dahal, 
Marketing Director of NOC, told EmbOff that, as of September 
28, NOC's outstanding loans owed to banks and financial 
institutions had exceeded the equivalent of USD 46.8 million. 
 Dahal added that NOC was forced to add new loans of 
approximately USD 21 million every month in order to meet 
losses from the sale of petroleum products and make payments 
on bank loans and interest.  NOC already owed approximately 
USD 21 million combined to Nabil Bank and Rastriya Banijya 
Bank, two of Nepal's largest banks.  Suresh Kumar Agarwal, 
Director of Distribution for NOC, informed us that, due to 
the government's subsidy of prices, the NOC incurred a loss 
of roughly USD 7 to 10 million every month.  According to 
media reports, NOC lost more than USD 112 million last year 
alone. 
 
CHANGING THE PRICING MECHANISM A MUST 
------------------------------------- 
 
4.  (SBU) Steady increases in the price of petroleum products 
in the international market, and the rapidly rising 
consumption of petroleum products in Nepal, have further 
amplified Nepal's loss.  According to Dahal, HMGN should 
allow NOC to apply market-based pricing on petroleum 
products.  With the current losses, NOC would soon be forced 
to shut, Dahal predicted.  According to Harendra Bahadur 
Shrestha, President of Nepal Consumers' Forum, the price of 
petroleum products should be regularly adjusted based on 
international price fluctuations.  Former Finance Minister 
Ram Saran Mahat opined to us that the only long-term solution 
was to develop a market-based pricing mechanism for petroleum 
products.  HMGN had proposed a plan whereby NOC would import 
petroleum products as far as the border, and the private 
sector would then take over and distribute the products; 
however, this plan suffered a blow when petroleum dealers 
criticized it as "raw" and refused to participate.  HMGN was 
reportedly revising its proposal. 
 
COMMENT 
------- 
5.  (C) Determination of the price of petroleum products has 
always been a sensitive political decision in Nepal, weighing 
the public's reaction to a price increase.  However, HMGN's 
policy of subsidizing prices, especially in light of soaring 
world oil prices, has caused huge losses to NOC.  HMGN now 
faces the choice of immediately increasing the current prices 
and developing a cost-based pricing mechanism further 
inciting the public, or facing an economic crisis that could 
cause HMGN great difficulty.  The political and economic 
costs to Nepal will only continue to rise as world oil prices 
increase. 
MORIARTY