Is Nepal Oil Corporation’s proposal to government rationale?

Nepal Oil Corporation on July 4 submitted a ten-point proposal to the Ministry of Industry, Commerce and Supplies with recommendations on reducing the consumption of petroleum products in order to offset the loss that it has been incurring.

As reported on July 5, the state-owned oil monopolist has paid Rs 115 billion in taxes to the government and its loss has reached Rs 54 billion.

The implementation of odd-even system for private and government vehicles, quotas on maximum fuel purchasable at one time for small vehicles, restrictions on the movement of vehicles on Saturdays are only some of the recommendations by NOC in order to contain the depletion of the foreign currency reserves and reduce its own losses.

These propositions are preposterous. There is a bit of misinformation, an outright disregard to the lives of common people and all economic actors in the country, and a blatant display of incomprehension as to the bearing it is going to have on the functions of the government itself. This just goes on to show how this is nothing but an attempt by the NOC to run away from its own responsibilities.

The loss figures of NOC are not entirely false but we have to keep in mind that there is a difference between the loss of a private enterprise and that of a state-owned enterprise, which is a part of the public sector itself. The main misinformation among people is regarding how NOC incurs these losses. When NOC claims that it purchases petroleum products at a certain amount, it is important to remember that the price is inclusive of the taxes paid to the Government of Nepal–which is its sole owner. For example, when the price of petrol had reached Rs 199 per liter on June 16, the purchase price for NOC was reportedly Rs 212.58. It actually purchased the fuel from Indian Oil Corporation at the rate of NPR 131.91 per liter. Rs 65.61 per liter was paid in the forms of various taxes as revenues to the government. It is true that NOC is selling these products at a loss, but the loss cannot be compensated by curtailing the supply. The right thing for NOC to do would be to ask the government to do one of two things. NOC could either ask the government to allow it to sell with a profit, which would result in exorbitant fuel prices. Or, it could ask the government to adjust its taxes. The government could reduce a certain amount of taxes levied on petroleum products from the selling price of petrol, and forgo the same in its own books.

Instead of doing what is right, and possibly more difficult, NOC is choosing to ride the public sentiment of fear created by the ongoing depletion of forex reserves. With people questioning if Nepal will follow the lead of Sri Lanka’s economic crash, perhaps NOC thought it would be easier for Nepalis to cling on to anything that is presented as a solution, and it is trying to capitalize on just that.

Further, this proposal completely disregards the lives and livelihoods of common Nepalis, as well as other economic actors of the country. There are many uses of petroleum products in addition to being used as raw materials in large factories. Many people use it to earn a living, be it in the form of transportation, or for small-scale production. If NOC were to curtail the supply of these products, it would slow down the economic activities of the country because it would result in problems like the inability of the people to perform their professional duties, and reduction in production by small industries, among others.  People would lose jobs, and the government would lose money. These recommendations completely overlook the gravity of the matter and the government cannot entertain this half-baked proposal seriously.

Another problem with the proposal is that it clearly shows how little NOC understands the functioning of the government. For the fiscal year 2021/22, the major source of revenue for the government is tax revenue amounting to Rs 1024.90 billion. The Trade of petroleum products is one of the largest sources of tax revenue for the government. The Government of Nepal collects more than Rs 100 billion in tax revenue from petroleum products, which represents over 5% of the total budget of the government. This revenue is allocated towards many important functions of the government such as healthcare and education. The government, and the country function from mobilizing these revenues towards priority sectors. Curtailing the supply of petroleum products and reducing petroleum trade would mean that the government would also generate lesser revenue which would essentially result in the government essentially cutting down on a number of functions because of lack of resources. Therefore, the implications of these rules, if implemented, would be far graver on the economy of the country than what is being portrayed.

It is true that the economy of Nepal is facing significant challenges right now. Cutting losses and maintaining balance of payment by cutting down on petroleum trade is one way out. However, it is by no means the suitable solution to the problems. But, if the government is still adamant on doing so, why stop at cutting trade by 20% or 40%? Why not go above and beyond and stop the trade altogether? Going by the logic of NOC, no trade would mean no loss.

Suffice to say, these recommendations are neither suitable for the short-term, nor are they viable long-term measures. In fact, it would pose even greater risks in the lives of the people as well as the economy as a whole, leaving everyone worse-off. There are more sustainable ways to tackle the economic problems we are faced with right now. The solutions can range from mid-term to long-term, where the government could be more accountable by focusing more on fiscal discipline and maintaining transparency. Further, bringing about conducive policy reforms in order to gradually move on to greener alternatives by substituting petroleum dependence, cutting down on subsidies, reducing benefits to government employees (especially in the form of fuel allowance), promoting job-creating enterprises would also go a long way to help the economy rather than these futile attempts at evading responsibility.

This article was originally published in Nepal Live Today by Anoushka Pant on July 11, 2022.