Nepal Oil Corporation has declared itself bankrupt despite having hiked fuel prices to near record levels. Insiders say the state-owned oil monopoly's announcement of empty coffers may be a prelude to further price rises.

The high cost of fuel is digging deeper into consumers' pockets, and the monthly consumer price inflation climbed to its highest level in 64 months in December, jumping to 7.11 percent year-on-year from 5.32 percent in November, as per Nepal Rastra Bank figures.

Crude prices in the global market have been on an unabated uptrend for more than a month. From a low of $69 per barrel on December 1, 2021, Brent crude prices have currently reached above $85 per barrel. This amounts to an approximate jump of 25 percent in four weeks.

In Nepal, the state-owned oil monopoly has hinted that the price of petrol may hit an all-time high, even reaching up to Rs150 per litre following dearer crude oil in the international market.

In March 2014, Nepal Oil Corporation jacked up the price of petrol to Rs140 per litre and diesel to Rs109 per litre, the highest-ever price hike in Nepal not counting the stratospheric rise in fuel prices during the Indian border blockade in 2015.

The steep rise in prices was a result of costlier crude and a falling Nepali rupee against the US dollar.

Officials at Nepal Oil Corporation say petrol could reach an all-time high and that the price rise may occur between two crucial elections slated for this year.

“We are at zero balance right now. We are at an Rs2 billion deficit to finance petroleum imports or pay the Indian Oil Corporation by January 23,” Nepal Oil Corporation said in a statement on Wednesday. The Indian Oil Corporation is the sole supplier of fuel to Nepal.

It is apparently back to the bad old days for Nepal Oil Corporation when the usually loss-making, cash-strapped public enterprise used to ask the government for handouts to import petroleum products.

On Thursday, the country's sole fuel supplier jacked up petrol and diesel prices by Rs3 per litre.

Petrol and diesel will now cost Rs139 and Rs122 per litre, respectively.

The price of aviation fuel sold to domestic airlines has been increased by Rs5 to Rs106 per litre, and the price of fuel sold to international carriers has been increased by $100 per kilolitre to $995 per kilolitre.

Even after the hike, the oil monopoly says its fortnightly losses are huge.

The Indian Oil Corporation reviews export prices of petrol and diesel/kerosene every fortnight, and of other products such as aviation fuel and LPG on a monthly basis.

The new price list sent by the Indian Oil Corporation on January 16 has put Nepal Oil Corporation into a fortnightly loss of Rs2.24 billion, the corporation said.

Following the review in prices, the corporation says it is incurring a loss of Rs13.18 on every litre of petrol sold, Rs8.81 on every litre of diesel and Rs646.16 on every cylinder of cooking gas.

In the first six months of the current fiscal year, the corporation said its balance sheet had gone from bad to worse. It says its losses in the first half have ballooned to Rs19.26 billion.

Corporation officials say it is covering its losses by dipping into its savings.

“We need Rs12 billion to maintain a smooth supply of petroleum products for three months,” Sushil Bhattarai, deputy managing director of the corporation, told the Post.

The corporation said it had been forced to borrow money to finance imports.

“We have been currently using money from the price stabilisation fund, and the fund is depleting,” said Bhattarai.

“Out of the Rs14 billion in the fund, Rs6 billion has already been used. We are also planning to make a payment of Rs2 billion to the Indian Oil Corporation from the price stabilisation fund on January 23,” he added. “We have to seek loans from banks or the government as prices may keep on rising.”

As the Sher Bahadur Deuba-led coalition government has not appointed an industry, commerce and supplies minister for a long time, officials at the corporation said that things may become worse.

“There is no option other than price adjustment,” Bhattarai said.

In November last year, the state-owned oil monopoly wrote to its line ministry to use the price stabilisation fund as it kept jacking up gasoline prices to all-time highs with no signs of global oil prices coming down.

The corporation set up the price stabilisation fund in 2014, a reserve created to absorb extreme volatility in selected commodity prices and avoid hurting the consumer.

It had also asked the government for loans to pay for imports.

As per international media reports, oil prices traded within striking distance of a seven-year high on Monday at $86.71 a barrel, threatening to drive global inflation up further as supply remained constrained and fears of another coronavirus pandemic-induced slowdown in demand faded.

In 2015-16, the Nepal Oil Corporation announced it had finally become debt-free after 14 years since it adopted an automatic pricing mechanism. Its debts had swollen to Rs36.87 billion as of January 2015. The corporation was able to pay off all its loans in one and a half years, thanks to falling oil prices in the international market and the new pricing mechanism.

Nepal used to subsidise fuel costs to prevent spiralling market prices. Every time the price rose, the oil monopoly would reduce imports to keep its ballooning losses in check, resulting in shortages and massive queues in front of fuel stations.

As a result of the June 2008 oil volatility, Nepal's annual inflation climbed to double-digit figures, reaching 12.62 percent in 2009, one of the highest.

Inflation has been ticking up again.

The monthly consumer price inflation reached 7.11 percent in December. The highest level the country had seen until then was 7.9 percent in September 2016-17.

Nepal imported petroleum products worth Rs106.10 billion in the first five months of the current fiscal year, a jump of 115.9 percent compared to the same period in the last fiscal year.

“There is already a sharp rise in demand for goods not only globally but in the domestic market as well. But there was a break in the supply chain due to the excess demand which has created pressure on prices,” Gunakar Bhatta, spokesperson for the Nepal Rastra Bank, told the Post last week. “Naturally, the current inflation is driven upward mainly due to an increase in transportation and freight costs.”

Nepal imports most of its goods, mostly food and fuel.

Experts warn inflation may jump to double digits this fiscal year.

“There are early indications that the inflation will reach a double-digit figure by the end of this fiscal year,” said economist Bishwambher Pyakuryal. “The rising fuel price is the key factor for the inflation burst.”