Econ-ity » July 28, 2014

Daily Archives: July 28, 2014

Robbing taxpayers in broad daylight!

So would you give your debtor Rs. 1000 to pay you back the Rs. 1000 it had taken from you a month ago? You wouldn’t, right? A stupid question! But trust me, you will give. Here I will try to explain what I mean by using the case of Nepal Oil Corporation (NOC), the government-owned oil monopoly of Nepal.

Petroleum is a highly political issue in Nepal and a 5% rise in the price of the products leads to huge protests in the streets all over the country. So government likes to come in and play the savior of the people. It controls prices (although the NOC board fixes prices, the political nature makes certain that the price fluctuations are consented by the ruling government). But in the international market, the petroleum product prices are not very stable. Since in Nepal, we do not practice Automatic Pricing Mechanism and instead control prices in the pretext of protecting the poor who cannot afford to pay the market prices for these basic-necessity petroleum products, NOC has to bear heavy losses in its business.

Here is what it implies to the taxpayers:

Vicious circle of petroleum supply in Nepal

Vicious circle of petroleum supply in Nepal

NOC imports petroleum products from IOC, practically on credit. It is supposed to make the payments in two installments within the next 30 days. Since NOC controls prices of its products and cannot charge market prices, it has to cross subsidize its products. The combined profits from all other products still fall short of loss made on LPG by hundreds of rupees per cylinder. As a result, NOC fails to recover its investment made in the import of products from IOC. But IOC will not sell anything to NOC, unless its dues are cleared. So, NOC approaches the government for loans. With government guarantee, it somehow gets loans to clear IOC dues from institutions like Employees Provident Fund (EPF) and Citizens’ Investment Trust (CIT), apart from government of Nepal and some commercial banks in the country. These mind you, are taxpayers’ money (mostly in form of saving, some as taxes paid to government). IOC dues are then cleared with this money. But the same business cycle continues, year in and year out. NOC continues to make losses and continues to acquire taxpayers’ money as loans. Amidst all of this, the loans acquired via CIT and EPF have never been paid. Interests are however paid duly by adding the interest payment component in the selling price of petroleum products. 

Table 1: NOC’s loan portfolio

S.N. Description                           Outstanding Loans (NRs)
1 Loan from The Government of Nepal (GoN)                                 12,64,10,00,000/-
2 Citizens’ Investment Trust (CIT)                                   8,93,00,00,000/-
3 Employees Provident Fund (EPF)                                12,35,00,00,000/-
4 Commercial Banks (CB)                                  2,74,00,00,000/-
5 Indian Oil Corporation (IOC)                                  2,50,00,00,000/-
Total                                39,16,10,00,000/-

*Source:Parliamentary Study and Recommendation Committee Report, Nepal, 2014 A.D

So let’s say, sometime in future, these creditors demand that their money be repaid. Clearly, NOC has no money to repay these loans. So what will it do? One possibility is that it will default on all the loans. Now that is plain bad. How can one default on Rs. 37 billion worth of taxpayers’ money? But this is a little unlikely. The very fact that there is government guarantee behind all these loans means that these will be paid. But would we let it be defaulted if we had the choice? – NOC does not have to pay anything; just shut down?

But hey, there are other possibilities how taxpayers might be repaid. And these kind of look like worse deals than having the loans defaulted. Since government has provided guarantees, it will pay back these loans. It will take fiscal measures to pay back these loans. Government might hike taxes through one fine fiscal budget. Its revenues will soar up and the loans will be cleared. Another possibility is that government will print money. But in doing so, it will devalue the money that we currently hold. To put it succinctly, it will compromise our wealth to pay its liabilities. Yet another mechanism can be that government takes a grant or a loan from some donor agency. Even then, if it is a loan, government will use one of these very measures that we have already discussed to pay back this loan. In case of a grant, the foreign nationals are paying through their tax money.

Now the Nepalese taxpayers have their money – but really? Who paid? To put it in a different way, they took money from us, made us pay the interests and when it was time to pay back the loans, they took equivalent sum of money from us again and acted like it paid the loans. And there is more to this! Since petroleum prices are controlled by the government/NOC, there is no guarantee that these new taxes will be slashed, once their purpose has been served. There is no competition and therefore, no incentive to think in the consumers’ best interest.

So let me rephrase my first question:

Would you allow NOC to default on this monstrous loan that it has accumulated from you, or would you use the government guarantee to retrieve your money?

Akash Shrestha

About Akash Shrestha

Akash Shrestha is a researcher at Samriddhi Foundation where his focus areas are investment laws, public enterprises and education.

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