The latest increase in pump prices is likely to have an immediate impact on the cost of living. From manufactured goods and food items to transport, costs are set to go up, pushing essentials further out of reach for many Kenyans.
In recent months, the government has tried to alleviate a steep rise in the cost of fuel by tapping into the Petroleum Development Levy (PDL) Fund to subsidise pump prices. In addition, since April this year, the government has also taken a haircut by reducing one of the most lucrative taxes, the Value Added Tax (VAT) on fuel, to eight per cent from the standard rate of 16 per cent.
These two interventions show the government is genuinely concerned about the effect of the rising fuel prices on the cost of living.
While commendable, it is clear that the interventions are not enough, as Wednesday's sharp increase in petroleum product prices (Sh226.96 for petrol and Sh227.76 for diesel) will dent families' budgets further.
To alleviate the situation, the government should consider doing what different stakeholders – including parliamentarians – have proposed in the past, which is to re-examine the taxation regime for petroleum products that has partly been blamed for high pump prices that have at times been higher compared to Kenya’s neighbours, including Uganda and Rwanda, which are landlocked and rely on the Kenyan and Tanzanian corridors to import fuel.
For instance, the Petroleum Products (Taxes and Levies) (Amendment) Bill, 2021, recommended the reduction of VAT to four per cent from eight per cent at the time, the PDL to Sh2.9 per litre of super petrol and diesel from Sh5.40 and the margins for oil marketers to Sh9 per litre.
The argument to review petroleum taxes has come up in the past and was even made to Parliament when proposals through the Petroleum Products (Taxes and Levies) (Amendment) Bill, 2021, recommended the reduction of VAT to four per cent, which was at the time at eight per cent, the PDL to Sh2.9 per litre of super petrol and diesel from Sh5.40, while at the same time reducing the margins for oil marketers to Sh9 per litre.
While such intervention will take time to be implemented, the government should consider offering consumers immediate relief by temporarily slashing or scrapping the Sh5.40 per litre PDL. This levy can be reintroduced in the coming months if the situation in the Middle East normalises.
In its statement on why prices shot up by significant margins this week, the Energy and Petroleum Regulatory Authority cited the drying up of the PDL Fund and, in turn, being unable to subsidise pump prices as among the factors.
In these circumstances, the government should consider offering consumers relief through temporarily slashing or scrapping PDL, giving consumers immediate relief of Sh5.40 per litre of super petrol and diesel. This can be reintroduced in the coming months as the situation in the Middle East normalises.
