The National Treasury is now mulling to get rid of the fuel subsidy, with National Treasury Cabinet Secretary Ukur Yatani arguing that it is benefitting the rich at the expense of the poor.
This is a line straight out of the script of the International Monetary Fund (IMF), which has been calling for the scrapping of Kenya’s fuel subsidy, describing it as inefficient and retrogressive.
“Fuel subsidies are inefficient and often lead to misallocation of resources and crowding out of public spending on productive sectors, resulting in unintended consequences such as disproportionately benefiting the well-off,” said Mr Yatani in a statement.
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Mr Yatani says the cost of the subsidy could surpass its allocation in the national budget, leading to higher debt levels as the country borrows to maintain it.
“For this reason, a gradual adjustment in domestic fuel prices will be necessary in order to progressively eliminate the need for the fuel subsidy, possibly within the next financial year.”
The next financial year starts in July. The National Treasury has allocated Sh100 billion for the subsidy in the fiscal year ending June 2023.
But has the subsidy benefited the rich more than the poor?
“There is some truth to that,” says Wahoro Ndoho, the chief executive of Euclid Capital and former director-general of public debt management at the National Treasury.
Mr Ndoho reckons that fuel subsidy, in a country with stark inequality like Kenya, is a form of middle-class welfare.
According to the census results of 2019, out of the 12 million households sampled, just about 6.8 per cent (758,710) owned a car or cars.
In Nairobi, with close to 1.4 million households, there were 192,813 households with cars, giving credence to a 2016 World Bank report that Kenya is largely a walking nation.
The report showed that 83 per cent of all trips in Nairobi include walking as the primary or secondary mode of travel.
If they are not walking, most city residents use matatus, from which they still have to complete the last leg of the trip on foot.
“Compared with other African primary cities, Nairobi has the largest share of walking trips,” reads part of the World Bank report. It also notes that only 17 per cent of all trips are made without walking.
The households directly hit by hike in fuel prices in Nairobi are the rich who spend nearly 18 per cent of their income on transport, followed by the middle class (14.14 per cent) and the poor (9.25 per cent), according to computation of the cost of living index (consumer price index) by the Kenya National Bureau of Statistics (KNBS).
Generally, households spend close to a tenth of their income on transport. To this end, suffice to say that the fuel subsidy has benefited the rich and middle class who drive more than the poor who tend to walk more.
Of course, some of the poor, and even the middle class, routinely use public service vehicles such as matatu to move around.
Moreover, says Mr Ndoho, with fuel subsidy, the poor also benefit from cheaper paraffin that they use for cooking and lighting.
Census data shows that close to 17.5 per cent, or 2.1 million households, use paraffin for lighting. Another 7.8 per cent, or 939,355 households, use it for cooking.
There is also the agreement that fuel has a knock-effect on the production process of almost everything.
Earlier, before yesterday’s statement, Yatani insisted that without the subsidy, prices of almost everything, including food, which takes close to half of the poor families’ income, would have gone through the roof.
“Fuel price is a trigger to the cost of living: Transport, food and all logistics,” said Mr Yatani.
In his Labour Day speech, President Uhuru Kenyatta said that without the fuel subsidy, everything transported by diesel would have gone up by 25 per cent.
Now, the National Treasury is backtracking on the subsidy. The hint that the National Treasury would be dropping it was given by Central Bank of Kenya (CBK) Governor Patrick Njoroge in March.
Speaking during a press briefing yesterday morning, Dr Njoroge said he expected the subsidy, which has shielded motorists from the spike in the price of petroleum products, to stay with the government picking up a ‘significant burden’.
“But I think, more importantly, it may not be at 100 per cent. There may be some sort of adjustments,” he said in his post-Monetary Policy Committee (MPC) press briefing.
Around the same time, Mr Yatani had also raised concerns that the subsidy burden kept rising.
Mr Ndoho reckons that while subsidies are generally problematic, the issue for Kenya was whether it could afford it.
“Subsidy in a poor country is not sustainable,” he said, noting that if the price shock was a thing that lasted for a few months, then it would be sustainable.
“Additionally, scenario analysis suggests that fuel prices could increase further, but even if they do not, they are not expected to revert to levels experienced prior to the Russia-Ukraine war,” said the National Treasury in a statement.
Besides the effects of the Covid-19 pandemic, the Ukrainian crisis has also aggravated the oil situation around the world with a barrel of crude oil now selling at over $112.48 (Sh13,148).
The weakening of the Shilling has not helped, with the cost of buying the input from the global market rising.
The money that will released by ending the subsidy, Mr Yatani said, will be used for more targeted spending such as supporting the most vulnerable, fertiliser subsidies, universal healthcare, and free primary and secondary education.