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IdentifierCreatedClassificationOrigin
03KATHMANDU549 2003-03-26 11:20:00 CONFIDENTIAL Embassy Kathmandu
Cable title:  

NEPAL: GOVERNMENT RAISES PETROL PRICES

Tags:   PREL EPET PGOV NP GON 
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					  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 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