February 2005
BIZNEWS

Haphazard Hike in Petro Prices

When state-owned Nepal Oil Corporation (NOC), which has monopoly over the import and distribution of the major petroleum fuels such as kerosene, petrol, diesel and LPG gas, effected a huge increase in the prices of these commodities early January 2005, the decision was not unexpected for those who had some idea about how huge the losses were in the corporation in the recent months as it was selling the products at much lower prices than what it was paying for the purchase.

But the manner in which it increased its sales prices has evoked a strong public wrath against the government. The political parties outside the government tried to capitalize on this sentiment, but that has been put to rest now after the political change of February 1. While revising the price upward, the authorities said the corporation was going to make a monthly profit of Rs. 50 million. That peeved the people: How do you dare raise prices to make a profit for the corporation which is supposed to serve the people rather than making profit? As the decision came on the wake of the 35 th anniversary function of the corporation, it seems the decision was intended more to please the employees of the corporation.

Fuel was added to the fire by increasing the price of the subsidized kerosene, the cooking fuel of the poorest urban population, by 25%. This is the highest increase across all the categories of petroleum.

In fact, the rise in the international prices in petroleum has been a boon for the Nepali government which collects import duty and other taxes at value. Being a commodity with low price elasticity of demand (demand does not change much even with increase in its price), when the international price increases in this product, the government automatically gets higher revenue from it. This explains why the government revenue is increasing even when the economic activities are not increasing and the companies are complaining of sluggish sales.

Also this time neither the government nor the corporation did announce any significant step to reduce wastage and leakages in NOC. The calculations made by the team that recommended the price hike in August 2004 had shown that the corporation would be able to reduce its losses by about Rs. 60 million-70 million if it is able to reduce its wastages by about 25%. But the team had also concluded that it would take about three months to achieve that much of saving.

Every time the petroleum prices are revised upward, the authorities do not forget to promise a system to review the prices more frequently so that single hefty increase would be avoided and the people may accept a marginal increase though frequent. They also promise effective mechanism to distribute the subsidized kerosene so that the benefits go to the target groups. This time too, they have repeated both of these promises. Nobody believes that the second promise will be successful as all the previous such promises have failed and there is no specific program announced to make it effective this time. Regarding the first point, it is worse this time: the NOC board itself is given the authority to revise the price, but there is no formula specified for such revision, hence, no safeguard to check unscrupulous price hikes in the future.

One major argument offered every time the prices are hiked is that the prices in India are higher than in Nepal thus causing the smuggling across the border if the prices are lower in Nepal. However, they do not apply the same logic while revising the price of LP gas which is still far cheaper in India than in Nepal. Moreover, Indian consumers are in a better position to absorb the higher price due to their continuously increasing per capita income thanks to the healthy growth in the economy. Nepali consumers are doubly at loss as their purchasing power is dwindling due to the downslide in the economy.

System adopted in India to fix petroleum price is based on strategic considerations with measures to ensure fuel safety. Nepali authorities still have not devised any such plans, thus leaving the people at the vagaries of international petro-politics.

The latest price hike is also followed by news reports about the preparations going on to enlist private sector participation in import and distribution of petroleum fuels. The details about the arrangement are, however, not made available.

Meanwhile, NGOs involved in promoting alternate sources of energy have expressed optimism that the hike in petro-prices will make it more attractive to develop such fuel sources as bio-gas, hydroelectricity, solar power etc.

New Governor of NRB

Bijay Nath Bhattarai has been finally sworn in as the new Governor of Nepal Rastra Bank (NRB)) replacing Dr. Tilak Rawal who retired at the end of his tenure.

Bhattarai was one of the Deputy Governors of NRB before being appointed the Governor. He was one of the three persons recommended by a committee formed by the government to select the new governor.

Bhattarai has, unlike other NRB officers, seldom expressed his views in public in the past about economic and monetary matters. The immediate challenges facing him include containing the inflation within 5% which is made difficult by recent hike in petroleum prices and increase in VAT. Another burning issue in front of him is the continuation of the financial sector reforms in which the immediate vexing issue is the problem of dealing with willful defaulters in repaying the bank loans.

Customs Reforms Planned

Nepal too celebrated the 53 rd International Customs Day in January 2005 during which the customs officials disclosed some of the reforms planned in the Nepali customs.

Talking to New Business Age, Krishna Hari Baskota, the Director General of Department of Customs, said special software is being developed to monitor on real time basis the valuation of goods by different customs and compare them across the customs and also with the international prices.

“A wide area network is planned to be set up linking the customs department with the customs offices where ASYCUDA is being used. With this the department will have access to latest data and information so that the department would be able to intervene immediately if required and make the necessary corrections.”

Regarding the frequent complaint of the importers and exporters about the delay and cumbersome processes in the customs, Baskota said, “At present in average 11 different documents are required to be submitted to the customs for the exports and 15 in case of imports. We are working to reduce them and we are planning to go for paperless customs very soon. Necessary changes in the existing laws are being considered for this purpose.” Giving example of one recent reduction in the number of papers needed to be submitted to the customs, Baskota said the importer and exporters now do not need to give the copy of PAN registration for every consignment. “The copy of the PAN registration submitted at the beginning of the fiscal year will be sufficient for the whole year.”

To reduce the time taken for the physical verification of the goods at the customs, the department is installing a modern scanner machine at Birganj in the February itself, he informed. “The machine will be able to scan the entire truck and there will be no need to unpack the goods. This will help to speed up the customs clearance, save on repacking costs and reduce the complaints of pilferage,” he added.

Another important reform will be in the green channel of the Tribhuvan International Airport, according to Baskota. At present, the rules do not require the user of the green channel to declare that he/she has nothing with him that need to be inspected for the customs purpose. Therefore, when caught, they have an easy excuse that they were not asked to make the declaration. “But now they will be required to make clear declaration that they are not carrying any item that needs to be reported for customs. This will reduce the misuse of the facility.”

NEPSE Lists 48 Cos in ‘A’ Category

Nepal Stock Exchange Ltd. (NEPSE) has classified 48 companies in its controversial ‘A’ category by adding seven companies to and dropping two companies from the last year’s list. The companies added to the list are Peoples Finance Ltd., Cosmic Merchant Bank and Finance Ltd., Om Finance Ltd., Gorkha Finance Ltd., Central Finance Co. Ltd. and Standard Finance Ltd. However, Nepal Development Bank and NIDC Capital Market have been dropped from the list.

The revised list has nine commercial banks, one development bank, ten insurance companies, 26 finance companies, one manufacturing company and one from other sector. There are no companies listed in ‘A’ category from trading.

TSF in New Form

The revised fiscal ordinance of mid-January 2005 has changed the system of collecting Tourism Service Fee (TSF) used by the Nepal Tourism Board to finance its operations.

As per the new system, each foreign national will be required to pay Rs. 500 plus 13% VAT on it before embarking on an aircraft leaving the country. Earlier, the collection system was to charge 2% on Value Added Taxable goods and services sold to a tourist by businesses catering to tourists such as hotels, restaurants and trekking agencies.

These businesses, which catered to tourists, criticised the earlier system as it made firms under the VAT net non-competitive vis-à-vis those that are not registered under VAT.

VAT Rate Hiked to 13%

The government, ignoring the suggestion of the business community, has increased the rate of Value Added Tax (VAT) from earlier 10% to 13% effective from mid-January 2005.

The business community had suggested to expand the VAT net rather, which could have been done by reducing the VAT threshold (the annual turnover which if reached makes it mandatory for the business to registered under VAT) from the existing Rs. 2 million, or by making VAT applicable also in additional goods and services.

It is feared that there will be two significant negative effects of the higher VAT: First, it will increase the prices of the goods and services causing the inflation rate to increase. Inflation in the forthcoming days is likely to be well above the targeted 5% as also the petroleum prices were increased just a couple of days before the VAT increase.