US embassy cable - 03KATHMANDU549

C O N F I D E N T I A L SECTION 01 OF 02 KATHMANDU 000549 
 
SIPDIS 
 
STATE FOR SA/INS 
 
E.O. 12958: DECL: 03/25/2013 
TAGS: PREL, EPET, PGOV, NP, Government of Nepal (GON) 
SUBJECT: NEPAL: GOVERNMENT RAISES PETROL PRICES 
 
 
Classified By: DCM Robert K. Boggs for reasons 1.5 (b,d) 
 
1. (U) Summary:  The Government of Nepal (GON) raised prices 
on all petroleum products to prevent further losses by 
state-owned Nepal Oil Corporation (NOC).  The price increase 
should substantially reduce the corporation's monthly losses, 
but will not produce a profit.  Prior to the increase, rumors 
and legitimate concerns about the future solvency of the NOC 
sparked fuel hoarding by industry and consumers, prompting 
the GON to take several measures to prevent a shortage. 
Popular perception that the Gulf War would limit supply 
contributed to the problem. End summary. 
 
FUEL PRICES NOW ON PAR WITH INDIA 
--------------------------------- 
 
2. (SBU) On March 26, at the recommendation of the Nepal Oil 
Corporation (NOC), the Government of Nepal (GON) announced 
substantial price increases on all petroleum products, to 
bring them into line with fuel prices across the border in 
India.  The government also has reintroduced a two-tiered 
pricing and rationing system for kerosene, the fuel most 
commonly used by domestic consumers.  Under the new system, 
"middle and lower class consumers" will pay 5 Nepali rupees 
(6 cents) less per liter than industrial and "upper class" 
purchasers and will receive rationing coupons allowing them 
to purchase up to 10 liters of kerosene per month.  However, 
no criteria have been established yet for "middle and lower 
class" designation, and a source at the Ministry of Industry, 
Commerce and Supply told Political FSN that, in reality, one 
coupon would likely be provided to every family that requests 
one, regardless of economic status. 
 
3. (U) Prior to the price hike, fuel prices in India were 
substantially higher than those in Nepal.  In towns along the 
border, the Indian price per liter for kerosene was almost 11 
Nepali rupees (14 cents) higher than in Nepal.  The price of 
a liter of diesel was approximately 10 Nrs (13 cents) higher, 
and the cost of a liter of petrol was approximately 4.5 
rupees (5 cents) higher.   Since Nepal imports fuel 
exclusively from India, the disparity in prices caused the 
NOC to post monthly losses running into the hundreds of 
millions of rupees, and the state-owned corporation has been 
seeking a price increase for the last eight months. 
 
RUMORS ABOUND; SO DO REAL PROBLEMS 
---------------------------------- 
 
4. (U) Media reports stating that the NOC was in dire straits 
convinced companies that a severe price hike was in the 
offing.  As a result, over the past few weeks industrial 
consumers purchased excessive amounts of fuel, despite 
already holding large stockpiles.  Domestic consumers, 
worried by the same reports as well as by media-fed rumors 
that the war in the Gulf will further restrict supply, lined 
up outside fuel stations to purchase far more than usual.  In 
addition, large quantities of cheaper fuel were flowing back 
across the border for resale at Indian prices.  Consumer 
hoarding and the artificial demand from India were depleting 
the already small petroleum reserves, reported to be about 17 
days worth of fuel, held by the NOC. 
 
5. (U) To try to check "panic buying" among consumers, on 
March 22 the GON decided to place restrictions on the number 
of vehicles allowed on the roads.  Cars with even-numbered 
license plates were allowed to travel on even-numbered days, 
and odd-numbered vehicles on odd-numbered days.  However, on 
March 26, the Supreme Court placed a temporary stay on the 
enforcement of the restrictions, pending a final verdict on 
the measure's legality. 
 
HALF A SOLUTION IS BETTER THAN NONE 
----------------------------------- 
 
6. (C) Public concerns about the solvency of NOC were 
well-founded.  On March 24, PolFSN spoke to Bijendra Singh 
(protect), Chief of Distribution for NOC, about the unfolding 
events.  According to Singh, the NOC is almost completely out 
of funds, and is "not in a position to settle its bill with 
the Indian Oil Corporation."  The next payment, for fuel 
purchases in February and March, is due on April 15.  In the 
event of non-payment, the IOC has already indicated that it 
will cut off supply to Nepal.  According to the acting chief 
of the NOC, contacted by PolFSN on March 26, by the end of 
March, NOC will owe a total of 930 million Indian rupees 
(IRs) (19.5 million USD) to the IOC, and will make a partial 
payment of 450 million IRs (9.5 million USD). By April 15, 
the amount due will be up to 1.8 billion IRs (37.8 million 
USD), of which the NOC plans to pay 800 million IRs (16.8 
million USD).  The acting chief could not explain how the NOC 
plans to pay the remaining amount. 
 
7. (C) Following the price hike, Rudra Bahadur Khadka, 
Managing Director of the NOC, told reporters that the 
increase has addressed the root of the problem, as the 
selling price is now equal to the import price.  However, the 
acting Chief of the NOC told PolFSN that the recent increase 
in price will simply reduce the corporation's losses, and 
that the corporation would be able to clear only partially 
its balance with the IOC.  According to the acting chief, the 
Nepali corporation had been losing approximately 750-800 
million Nrs (9.6 - 10.3 million USD) per month; monthly 
losses will now be 100-120 million Nrs (1.3 - 1.5 million 
USD). 
 
COMMENT 
------- 
 
8. (C) The price increase for petrol products is likely to 
stretch the budgets of Nepal's middle and lower classes, but 
the measure was a necessary evil.  NOC's mounting losses 
created an artificial situation in which kerosene cost less 
than mineral water.  The country's continued fuel supply was 
at risk and its limited current supply, purchased at a loss, 
was flowing back across the border.  While the proposed 
two-tiered pricing system and rationing cards for kerosene 
may be an artful political dodge, it would be better for 
Nepal to bite the bullet now and raise prices across the 
board. If the two-tier system is implemented, it will simply 
reduce the urgently needed revenue that the price hike is 
intended to generate, and prolong the NOC's inability to meet 
its financial obligations.  Crises like this week's will 
continue to arise as long as government subsidies continue to 
co-exist with a lengthy, porous international border.  Post 
will continue to monitor the situation for potential 
political backlash, either tied to the war in the Gulf or 
directed solely at domestic actors. 
MALINOWSKI