June 1, 2015 Print

In nations with a high degree of central planning, the products with the most crucial roles in the economy tend to be the ones subject to the greatest control by government officials. This interference inevitably makes those products far more scarce and expensive. In Nepal, the predominantly agrarian economy relies heavily on petroleum and fertilizer, but a new study from Atlas Network partner Samriddhi, The Prosperity Foundation, shows that the high levels of centralization, regulation, and subsidy of these products has led to corrupt markets that don’t meet Nepal’s agricultural demands.

Nepal imports all of its petroleum products, more than US$1 billion annually, yet a single government organization, the Nepal Oil Corporation (NOC), handles all of the imports. This chokehold on the petroleum market leads to astronomically higher prices for petroleum products than in other nearby nations, including a 315 percent higher price for Superior Kerosene Oil and a 121.7 percent higher price for Liquefied Petroleum Gas than in neighboring India.

“The sole importer of petroleum products in Nepal, the NOC, operates without a governing Act and for the most part, sets the rules of its own game,” the Samriddhi study explains. “The sheer volume of its transactions and the absence of any governing legal principle make NOC prone to excessive politicization and corruption. The current financial health of NOC, lack of accountability towards taxpayers and the lack of economic soundness in policy and operations render consumers extremely vulnerable.”

Although 78 percent of Nepal’s adult population is involved in agricultural occupations, the nation’s rapidly increasing population and declining conversion of land to farms has led to a crucial role for fertilizer in increasing agricultural yields. Similar problems prevail in Nepal’s fertilizer markets, however, with a state-owned enterprise, Agriculture Inputs Company Ltd. (AICL) importing and distributing the vast majority of fertilizer in Nepal, with subsidies amounting to nearly a quarter of the nation’s annual budget.

“However, current subsidy program fails to meet the picking demand of farmers,” the study explains. “Most fertilizers in Nepal are now supplied by black market. Returns from agriculture sector remained low and per capita GDP is only US$140 per agricultural worker ... With little scope for increasing area under cultivation, population growth has led to falling average farm size and increasing fragmentation, which results in growing poverty.”

Samriddhi notes that only by opening the markets for petroleum and fertilizer to private-sector competition will Nepal’s agricultural industries be able to reduce their input costs, innovate, benefit consumers, and achieve economic sustainability.

Read the full study, “Trade Study Series: A Look at Petroleum and Fertilizer Supply in Nepal.”