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Nepal’s petroleum policy: Subsidy is its one and only policy

Bhuwan Thapaliya - 2/5/2008

Nepalese government authorities are having a headache: In the past five years, crude oil prices have roughly tripled in nominal terms—from around US$30 per barrel to around US$90 but at the same time, Nepalese economy has deteriorated, and as a result the authorities are having trouble reconciling ever soaring crude oil demands with its limited resources.

Early last week, the government hiked the price of petroleum products in the wake of soaring crude oil prices the world over, but the move proved so unpopular that it was forced to suspend its fuel hike. Protestors were all over the place, they opposed the price hike and called a general strike, and sensing that it may add fuel to the fire, government under political consideration decided to take back its decision of price hike.

By doing so, the government was able to protect the interest of the common people, but in practice it completely abstained itself from economic consideration.

From a market perspective the rise in prices was logical and timely considering the global price of the petroleum products. But if we see the price hike through the eyes of the ordinary Nepali masses before the Constituent Assembly Election, then the decision seems to be deceptive given the fact that it would have furthered dethroned the prospect of CA election and the national objectivity of poverty reduction.

The decision, it if had been stamped would have caused commotions, violence, and would have provided a fertile playground for the anarchist to defile the CA election. And from economic side it would have sunk common Nepalese further into the vicious circle of poverty, that very circle from which they are trying to come out.

However, considering the basic economic reality, various questions erupt, the chief being,” How the government would react to the ever soaring loss of the Nepal Oil Corporation as the petro- debts to be paid to India are piling up?” Shielding consumers from rising global energy prices is expensive for any government and Nepal is no exception.

Nepalese Government's petroleum policy, if they have any policy at all, is in mess and it is suffering fundamentally.

Does Nepal have a Petroleum policy? It seems that Nepalese Government doesn’t have any petroleum policy. Subsidy is its one and only policy.

As in the past, Nepalese government and the Nepal Oil Corporation are sharing the fiscal burden by shielding consumers form the sharp rise in international oil prices but cracks are opening up. The deficits are widening and many analysts are wondering how long the government will be able to shield its consumers.

Subsidy is not new and as the concept of welfare state is getting global, more and more nations are practicing this form of protection. Today, no matter how hard they preach in support of free trade, in reality, countries such as the United States and Japan too provide huge subsidies to their farmers. But here in the context of Nepal , the efficiency of the subsidy is open to question because some researchers have estimated that heavily subsided kerosene and LPG does not reach targeted households. They are reaped of the air, by the richer half of Nepal ’s urban population.

Furthermore, in the short run, the government’s subsidy scheme shields Nepal’s poor from higher energy prices but in the long run, more government debt, however, means a substantial rise in future tax liability that will largely have to be met by the Nepalese.

On the other hand, current indications suggest that inflationary pressures are building up and the recent fuel hike would have troubled most of the ordinary Nepalese (not from the expensive fuels but rather from the increase in price of day to day commodities for their very survival as a result of the fuel hike), who are living way below the poverty level as marginalized by the World Bank. Had the government raised the fuel price then hyper- inflation would have further deteriorated the living standard of ordinary Nepalese.

Meanwhile, let us be realistic and realize that subsidy is only a temporary solution to our permanent problem. Shielding consumers from rising global energy price through subsidy has been giving Nepal a macroeconomic headache because of our poor fiscal situation. And Nepal is prone to further macroeconomic headache because demand for oil is ever increasing whilst supplies have begun to decline. The gap is growing and the price will in the long-term continue to rise.

Because government forces Nepal Oil Corporation to sell oil well below what it costs to buy, the debts of NOC is rising and India has cut back its petroleum supply to Nepal , resulting in long queues at the pumps. True market cost of the oil has skyrocketed in the world and considering so, Nepal Oil Corporation raised fuel prices with the dual motive of salvaging its loss and ending the shortages. It would have helped but it was not to be so because immediately the move was criticized and there was a furor in the streets.

And the oil shortage is already seen on the market. People are waiting hours to fill up their vehicles in the various petrol pumps of Kathmandu , and no one knows how long we will have this problem. What we are seeing in Nepal has already happened in America . For instance, in 1973 and in 1979, the oil crisis induced the US government to pass oil price controls, and Americans spend hours and hours in long queues at petrol stations.

Then in the 1980’s, America left it for the healthy equilibrium of supply and demand to negotiate its own market price. But America is a rich nation, and conditions in America cannot be compared with the conditions of Nepal . Market at times cannot be let lose in Nepal because even a mild inflation in Nepal will have direct impact to the majority of its citizens and expensive petroleum means further financial burden to the majority of the masses who are already living below the poverty line.

Something must be done. What, then, should government do to overcome Nepal ’s petroleum problems? It just cannot afford to make subsidy its best policy forever. It is high time the government took some tax off petroleum products. It's not the price of the petroleum products that's too high; it's the level of tax on it. Hence, what about shaving some tax off.

There is no likelihood that the government may cut tax but if its does, then the dilemma for the government is this: If the government cuts tax on fuel, they will have less money to spend on various other sectors such as health, education and development. But as Nepalese government has the history of wasting tax revenues, tax cut in fuel isn’t a bad option given the fact that fuel prices are high and it looks that we will very high fuel prices for years to come.

Whether to cut tax or not, this debate will go on and on. But even if we cut the tax, there will be only minimum effect because the greatest reason for the oil price hikes is the profiteering nature of those involved in oil production, refinery and business. Critics say that the nations with advanced technologies have done nothing to make it cheaper and they are reaping the benefit out of the soaring crude oil price in the international market. President Bush in his recent visit to the Middle East requested the Oil Producing nations to produce more fuel to add more impetus to the world economy crippled by the soaring crude oil price.

Nonetheless, no matter how much we blame the fuel producing nations, middlemen, their technologies, one this is sure. Crude oil prices will rise in the future too because oil is a scare resource. Hence considering this economic reality, protecting consumers' economic health will remain a priority in the Nepalese Government’s agenda but rising fuel prices will make their task very difficult.

This means that if the government wants to solve this problem permanently, then it must allow prices to rise and fall according to the global market, as they can actually relieve pressure on government. But this economic reality looks good only on papers because, it is hard to implement it in Nepal, where letting the market decide its own course, and stopping subsidy means more Nepalese sinking further into the abyss of poverty. And here in, studs the greatest dilemma facing the Nepalese government of late.

I think time has come for Nepal to find alternative energy source. At times like this, when the nation is in dilemma, whether to keep on subsidizing or allow the law of supply and demand to stabilize the market on its own, I remember what we used to rote like a parrot in our school days,” Nepal is second only to Brazil in hydropower.”