When a loss making NOC saps and cripples entire system

KATHMANDU, Feb 5: 

Government apathy to deregulate petroleum prices for long compelled taxpayers and poor people living in rural areas to bear the cost of oil subsidy while petroleum products are consumed in abundance in cities. Now, it is set to victimize civil servants, school teachers, health workers and security agencies.

Imprudent management of oil loss has made these new groups to bear the brunt mainly because the government in the course of avoiding much-needed reforms compelled Employees Provident Fund (EPF) and Citizens Investment Trust (CIT) -- two public sector institutions wherein 450,000 government and private employees have put their long-term savings -- to finance oil imports. 

Technically insolvent Nepal Oil Corporation (NOC), reeling under cumulative loss of over Rs 14 billion in mid-July 2011, has taken Rs 6.50 billion in loans from EPF and Rs 1.80 billion from CIT so far. Ministry of Finance (MoF) says the loans are safe because those are backed by government guarantee.

Government guarantee notwithstanding, the ailing state-owned petroleum import monopolist has not even managed to service the interests on time. Top officials at NOC termed it pretty obvious given the fact that NOC recoups little money from sales and depends heavily on loans arranged by the government to continue imports -- its basic duty.

"It is difficult for us to say by when we shall be able to repay them," said NOC Spokesperson Mukunda Dhungel, indicating that it does not see any chance of settling those debts in the near future.

For the loans, EPF and CIT were expecting NOC to pay 9 percent interest per annum. However, the loans investments are not fetching due returns. Uncertainty of payment and consistent gloomy financial outlook of the corporation is turning the lenders anxious now.

As name suggests, EPF is the manager of provident fund of the government, public and private sector employees and has been helping the savers financially on retirement or separation from their jobs. CIT too has been managing funds of small and medium level savers under its retirement fund, pension fund, and insurance fund schemes, among others.

Just as any other financial institution, these institutions rely on loans and investment to generate returns. Given their objectives and pledges, these entities were offering higher deposit interest than the market till recent years and pledging loans on special discounted rates (much less than market rates to their contributors).

But they were facing troubles to maintain those offers over the past two years. For instance, interest that EPF provides on deposits today is less than what commercial banks in general give. It has raised interest on loans taken against contributions and also jacked up lending rates on home and education to 11 percent from almost 9 percent during the period.

"In such a situation, lack of repayment of principal and interests by NOC will definitely have its impact," said Rameshore Prasad Khanal, Prime Minister´s Economic Advisor.

A senior EPF official agreed. However, he did not divulge on by what extent it would actually impact the savers. "It is already exerting pressure on us to review existing facilities," he stated.

Senior officials at MoF too said government insistence to finance oil imports through EPF and CIT loans is forcing them to widen their spread rate (difference between deposit and lending rates). 

This means these institutions can either drop deposit rates or increase lending rates. In that case, 450,000 civil servants, Nepal Army, Nepal Police, Armed Police Force personnel, teachers and private sector employees from 28,000 institutions that contributed in EPF and almost similar number of public sector savers of CIT will soon find earnings on their savings going down or will be forced to pay more for loans. 

It is not that the people who manage and oversee NOC are not aware of the situation. In order to avoid this situation, Minister for Commerce and Supplies (MoCS) Lekh Raj Bhatta recently proposed the government to waive off all the loans of NOC, which stands at well over Rs 21 billion.

But will that help? "No," says Khanal, adding that waiver will still force the government to burn taxpayers´ money, as it needs to settle loans of EPF and CIT. This, in turn, will again eat into its capacity to meet expectations of a rise in perks of public sector employees. 

"Like it or not, civil servants will bear the cost of subsidy anyhow," said Khanal, reiterating that there is no other option for Nepal but to adjust the fuel prices in line with the international trend, if it wants to save public from undue cost and possible fiscal risks.

Source: Republica