Harder times as State expected to end all fuel subsidies

Kenyans might have to dig deeper into their pockets as the government is expected to do away with remaining fuel subsidies today.

While there are expectations that reduction in crude oil prices over recent months will reflect on the new prices that the regulator will announce later today, the plan to remove subsidies on the products could mean they will continue to retail at relatively high prices.

The impact of lower crude oil prices in the global markets might also not be felt locally, owing to a weak shilling. The shilling hit an all-time low this week, trading at Sh123.77 against the US dollar, according to the Central Bank of Kenya.

In cushioning diesel and kerosene consumers, the Energy and Petroleum Regulatory Authority (Epra) has been denying super petrol users - mostly private motorists - savings that accrued from a drop in price of the fuel in the global markets.

Instead, super petrol users have been cross-subsidising diesel and kerosene users to the tune of Sh8.5 per litre over the pricing cycle that ends today.

The government stopped subsidising super petrol in September, while reducing subsidies on diesel and kerosene, which resulted in retail fuel prices reaching an all-time high.

Retaining subsidies on diesel and kerosene was in an attempt to cushion key economic sectors such as transport and manufacturing that are heavily reliant on diesel, as well as low-income households that use kerosene for lighting and cooking.

The National Treasury has however recently said it would eliminate all the subsidies and instead subsidise production through provision of cheap fertilisers to farmers.

"The government will eliminate the remaining unsustainable and consumption-driven fuel subsidy by end of December 2022, but will continue to offer support to agricultural production through the fertiliser subsidy programme," said Treasury in the 2022 Budget Review and Outlook Paper (Brop). Treasury's plans are in line with conditions by the International Monetary Fund (IMF), which has been pushing the government to scrap the fuel subsidy as part of its lending conditions.

"Domestic fuel prices are being brought into line with developments in international markets, with petrol subsidies fully eliminated in September 2022, and modest cross-subsidisation to support kerosene and diesel, which are more heavily used by the vulnerable," said the IMF.

It further reiterated the need for scrapping of the subsidies in a December review that saw the IMF board approve release of Sh53.2 billion to the country for budgetary support and the fight against drought.

Without the subsidy, the price of diesel would have gone to over Sh180 per litre compared to the subsidized Sh162. Super petrol would, on the other hand, have been retailing at around Sh169 per litre compared to the current Sh177.30.

Diesel prices have gone up globally as markets rebounded and demand grew. Additionally, there have been jitters owing to uncertainty over Russian oil supplies to Europe as the region sanctions the country over its invasion of Ukraine. The sanctions take effect in February.

The result is that the landed cost of diesel at Sh116.12 per litre and that of kerosene (Sh106.77) are much higher than that of petrol at Sh89.15 per litre. The landed cost is the price of the product before taxes, retail and wholesale margins, as well as subsidy considerations, are added.

The government says it had spent Sh144 billion in subsidising Kenyan motorists between April 2021, when it started the subsidy programme and August 2022. It had estimated that it would spend Sh280 billion over the 2022/23 financial year if it had gone on with the subsidy.

The government then noted that subsidising consumption was unsustainable, noting that it would instead subsidise production through provision of cheap fertiliser in a bid to tame the high cost of living.

An end to the fuel subsidy means higher diesel prices, which will raise the cost of transport, mechanised farming and industrial production.

The sustained high fuel prices have had a knock-on effect on the cost of living and doing business in the country, with the prices of goods, household energy bills, and transport remaining stubbornly high at 9.1 per cent in December.