VZCZCXYZ0010
RR RUEHWEB

DE RUEHKT #0638/01 0670910
ZNR UUUUU ZZH
R 080910Z MAR 06
FM AMEMBASSY KATHMANDU
TO RUEHC/SECSTATE WASHDC 0630
INFO RUEHNE/AMEMBASSY NEW DELHI 9326
RUEHKA/AMEMBASSY DHAKA 9360
RUEHIL/AMEMBASSY ISLAMABAD 2271
RUEHLM/AMEMBASSY COLOMBO 4284

UNCLAS KATHMANDU 000638 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EPET ENRG ECON ETRD EFIN PGOV NP
SUBJECT: GOVERNMENT PARTIALLY DEREGULATES PETROLEUM 
TRADE, HIKES SELLING PRICE 
 
REFS: 05 KATHMANDU 2308 
 
05 KATHMANDU 2210 
05 KATHMANDU 2555 
 
SUMMARY 
------- 
 
¶1.  (SBU) On February 13, His Majesty's Government of 
Nepal (HMGN) announced an end to government control over 
retail pricing of petrol and diesel.  After successive 
financial crises faced by the monopoly state-owned Nepal 
Oil Corporation (NOC) in 2005, a major move toward 
deregulation of the petroleum trade was increasingly 
necessary.  The announcement, however, fell short of 
expectations for broader-gauged reform.  The private 
sector cautiously welcomed the decision, but also urged 
gradual deregulation of imports.  Compared to popular 
protest demonstrations against previous petroleum price 
increases, the recent wholesale price hike in kerosene 
and diesel generated little public reaction.  Finance 
Minister Jyoti told a March 6 meeting of international 
donors the deregulation of oil prices was a major step in 
HMGN's effort to push through market-oriented reforms. 
With the new wholesale prices, NOC managed to break even 
in sales of a few imported petroleum products, but 
continued to incur an overall loss.  NOC's cumulative 
loss to date amounts to USD 170 million.  End Summary. 
 
HMGN PARTIALLY DEREGULATES PETROLEUM TRADE 
------------------------------------------ 
 
¶2.  (SBU) In a major decision on February 13, HMGN 
removed government control over retail pricing of two 
highly consumed petroleum products, petrol and diesel. 
However, the monopoly oil importer NOC still remains the 
sole importer of all petroleum products.  After NOC sank 
into a financial crisis caused by HMGN-regulated 
subsidized pricing of petroleum products, in November 
2005 HMGN started developing draft legislation to end 
NOC's monopoly in the petroleum trade.  The draft act was 
expected to deregulate both imports and sales of 
petroleum products and introduce a market-based pricing 
mechanism.  The recent policy decision brought only a 
partial deregulation of the petroleum trade.  Under the 
decision, NOC will now fix the ex-depot (wholesale) price 
for petrol and diesel, and retailers are free to fix the 
retail price.  Bimal Wagle, Joint Secretary of the 
Ministry of Finance, told EmbOff that HMGN considered 
this decision as the first step toward full-scale 
liberalization of the petroleum trade. 
 
NEED FURTHER DEREGULATION 
------------------------- 
 
¶3. (SBU) Finance Minister Roop Jyoti claimed to a formal 
gathering of international donors on March 6 that the 
deregulation of petroleum prices was one of a series of 
significant steps HMGN is taking to move the Nepali 
economy in a free market direction.  He described the NOC 
as "a great milking cow" for the country's politicians. 
Under their rule the NOC had "bloated" from what should 
have remained a total of about 50 employees to almost 
¶700.  HMGN, Joyshi asserted, had "finally addressed this 
situation."  Noting that some of the donors present had 
merely suggested that petroleum prices be adjusted more 
frequently to keep pace with costs, Jyoti boasted, "We've 
dismantled the whole NOC pricing mechanism" and that this 
had "removed a huge burden from the national treasury." 
The Minister added that "the people had accepted" the 
attendant price increases because, unlike past price 
hikes, they sensed that the government was not 
manipulating prices. 
 
¶4. (U) Shiva Prasad Ghimire, President of the Nepal 
Petroleum Dealers' Association (NPDA), told EmbOff that 
the NPDA cautiously welcomed the government's decision to 
deregulate retail prices of petrol and diesel, but would 
also like to see the government take positive steps 
toward petroleum import deregulation.  Ghimire added that 
deregulating retail prices had allowed competition, and 
as a result, consumers would benefit.  Prachanda Man 
Shrestha, Joint Secretary of the Ministry of Industry, 
Commerce and Supplies, told EmbOff that HMGN needed to 
remove its control over wholesale pricing if the NOC was 
to be protected from incurring huge losses, and for the 
private sector to become firmly established in the 
petroleum trade. 
 
NOC RAISED WHOLESALE PRICE OF PETROLEUM PRODUCTS 
--------------------------------------------- --- 
 
¶5. (SBU) Through an announcement on February 17, NOC 
revised the ex-depot (wholesale) price of petroleum 
products.  NOC increased the price of kerosene by 22 
percent, diesel by 15 percent and aviation fuel by 4 
percent.  Prices of petrol and cooking gas remained 
unchanged.  Even though the price of petrol is higher 
than the NOC's buying price, NOC continued to lose 
roughly USD 3.0 million per month on the sale of cooking 
gas.  Suresh Kumar Agarwal, Marketing Director of NOC, 
told EmbOff that the new wholesale prices of kerosene, 
diesel and aviation fuel were raised to the break-even 
level.  Agarwal added that NOC had already incurred a 
cumulative loss of USD 140 to 170 million due to the 
delay by HMGN in making this decision, and the loss could 
not be recovered.  According to media reports, NOC 
currently owes around USD 63 million to commercial banks 
and USD 56 million to the Indian Oil Corporation (IOC), 
and has used USD 50 million of its own savings to cover 
the differences in its buying and selling prices. 
 
COMMENT 
------- 
 
¶6. (SBU) HMGN's decision to deregulate the price of 
petroleum products, risking a political backlash, was a 
positive move.  Finance Minister Jyoti is justified in 
claiming credit for it as such.  The government's action, 
however, fell short of the complete deregulation some 
observers had hoped for.  Though critics had argued that 
deregulation would lead to public protest, in reality, 
there was little if any furor over the government's move. 
This is due in part to the increased awareness that 
Nepal's prices of petroleum products are affected by 
international prices.  The media did an excellent job 
educating Nepalis about the need to bring Nepal's prices 
in line with international prices.  Despite common fear 
that privatization of the petroleum trade would promote 
cartel formation, the market has reacted positively after 
the recent deregulation of retail prices of kerosene and 
diesel.  HMGN should now quickly work to remove the 
subsidy on cooking gas, and gradually deregulate imports 
to ensure fair competition between NOC and private 
dealers.  Promoting Foreign Direct Investment (FDI) as a 
means of upgrading Nepal's ancient petroleum distribution 
system would be a major leap forward. 
 
MORIARTY