Fuel price hikes loom as state agencies plan subsidy cuts

A car being fueled at petrol station. [File, Standard]

Kenya is set to reform its fuel pricing mechanism in a move that could lead to higher prices of petroleum products in the country.

The government told the International Monetary Fund (IMF) that it aims to align domestic fuel prices with budgeted resources and completely phase out fossil fuel subsidies to enhance its financial discipline. 

The National Treasury and the Ministry of Energy and Petroleum are working to strengthen the Petroleum Development Fund (PDF), which stabilises fuel prices.

An upcoming audit by the Auditor General will assess the fund’s management and the overall fuel pricing mechanism. “We are taking decisive steps to ensure that decisions on domestic fuel prices are aligned with budgeted resources,” the government said in correspondence to the IMF seen by The Standard.

“To ringfence the resources budgeted for price stabilisation purposes, we have assessed the governance structure of the PDF and recommended actions to strengthen its management.”

The Auditor General’s audit will evaluate how funds are used in the PDF and the overall fuel pricing mechanism. The review aims to establish clear parameters for price stabilisation that consider market fluctuations, exchange rate developments, and the financial health of oil marketing companies.

“Consistent with our requests for access under the IMF’s Resilience and Sustainability Facility (RSF), we are committed to ="https://www.standardmedia.co.ke/business/business/article/2001501027/kenyans-get-raw-deal-in-fuel-prices">transitioning to a low-carbon economy< by avoiding fossil fuel subsidies going forward,” the government says.

While the government plans to transition to a low-carbon economy, the move to end subsidies could have immediate consequences. Rising fuel prices could increase transportation and goods costs, particularly affecting low-income households.

Subsidies have historically been used to cushion consumers from volatile fuel prices, making fuel more affordable, especially for low-income households. They also help stabilise the economy during global price shocks. 

However, continued reliance on these subsidies can strain public finances and="https://www.standardmedia.co.ke/health/business/article/2001481501/fuel-prices-increase-goes-past-sh200-per-litre-in-latest-epra-review"> divert resources < from essential services, leading to calls for reform.

“The Auditor General’s office will conduct and publish a comprehensive audit of the use of funds in the PDF and the fuel pricing mechanism and recommend actions to strengthen the design of triggers for price stabilisation decisions with clear parameters that are not only a function of market prices, exchange rate developments, and margins of the oil marketing companies but also of resources concurrently available in PDF for stabilisation purposes,” the government added.