Oil crisis: Management of financial resources

Raghab D Pant

It is now clear that the occasional shortage of oil and oil products in the market followed by the long queues at the petrol pumps is due to the inability of the government to adjust domestic price to a change in world prices as well as its hesitation to release adequate funds to the concerned institution to maintain such artificial domestic price, fixed by administrative whim, rather than by market supply and demand. As a result, the Nepal Oil Corporation (NOC), a government-owned enterprise with monopoly on oil import, is virtually bankrupt with no resources to import oil except on credit that one creditor, namely the Indian Oil Corporation (IOC), has refused to provide without part payment of past dues — a reasonable, if not very soft, demand.

This means, in effect, there will be adequate oil in the market if (i) the import trade is only on cash basis; (ii) the import payment is made in accordance with the agreement reached between NOC and IOC; (iii) the domestic price is adjusted regularly to meet import price, and (iv) the government reduces the tax it has imposed on import of oil and oil products by NOC. In the latter two cases, NOC will be able to run its operation with huge profit.Unfortunately, the government has decided not to change the domestic price of oil before the election to the Constituent Assembly or to take any other measures on the domestic front — there have been customary long talks of involving private sector in the import trade of oil — to solve all the current problems once and for all. The government, on the other hand, has unnecessarily provided the issue a “cover of national crisis” and, as expected, the PM called the Indian ambassador for his help “in getting full supply of petroleum products resumed to Nepal,” though the Government of India has nothing to do with the crisis whatsoever except that IOC is also a government enterprise with a written business deal with NOC.

It is now safe to assume that the intensity of the problem may lessen only if the IOC decides to provide oil and oil products on credit to its bankrupt colleague. It will, however, further deepen the financial crisis of NOC as it is obliged to sell the goods at a price which is substantially less than the cost it has to incur. The Government of Nepal will, of course, benefit, firstly, by solving the current problem characterised by the shortage of oil and oil products and its low national reserve and, secondly, by an increase in government revenue from the tax paid by NOC on the import of oil. The only loser will be IOC and if I were its executive director I would definitely not sell goods to another enterprise that has difficulty making a part payment of Rs 240 million on a loan of about Rs 6000 million.

The government has often used the generosity offered by the Indian government for political purposes, in particular, to maintain the distorted domestic price structure that cannot be sustained in the long run or in the absence of assistance from India. The price of oil and oil products is the current example. Similarly, the exchange rate of the Nepali currency vis-à-vis Indian currency has been maintained at an artificial level by the Nepal Rastra Bank (NRB) by selling its US dollar to the Reserve Bank of India for the Indian currency, for which it has no adequate reserve to meet the public demand at the fixed rate of NRs160=IRs100; in the first six months of the current fiscal year, according to press reports, NRB has boughtRs 50 billion worth of Indian currency by paying US dollar. In addition, the import payment of about 91 commodities from India is made in dollar. It appears that such a misuse of the generosity provided by the friendly country has given the false impression to the public with a negative feeling about the concerned country itself.It is difficult to understand the national financial management in a unified method. NOC has difficulty making a part payment on its past dues, as stated earlier. The Government of Nepal, on the other hand, has no shortage of resources — the unused cash reserve of the Government of Nepal at the NRB in mid-April, 2007, totals Rs 18 billion — as its capital expenditure in the first ten months of the current fiscal year totals just Rs 11 billion, or 25 per cent of the allocated budget.

The government’s inability to use available resources for development has been instrumental in creating “stagflation” in the country, an economic situation characterised by stagnant income in real terms and rising price level. In fact, the government, if it so desires, can provide financial resources to NOC to clear the outstanding loan of IOC. There would be no reason to panic if the government managed the available resources with proper coordination within and among the ministries — a rare commodity for Nepal. The whole crisis can be solved with a minimum but intelligent effort.Dr Pant is executive director, Institute for Development Studies