It's pain at the pump for motorists as State eliminates petrol subsidy

A fuel pump attendant fuels a vehicle at Rubis Petrol Station in Nairobi on April 2nd,2022. [Elvis Ogina, Standard]

Kenyans should brace themselves for another round of hikes in the prices of essential commodities following an increase in the cost of fuel and electricity.

In new fuel prices announced yesterday, the government eliminated the subsidy on super petrol, while reducing the subsidy on diesel and kerosene.

Super petrol increased by Sh20 and will now retail at Sh179.30 per litre in Nairobi up from Sh159.12.

Diesel has jumped to Sh165 from Sh140 and kerosene to Sh147.94 from Sh127.94. Diesel is subsidised at Sh20.82 per litre while kerosene has a subsidy of Sh26.25.

At the same time, the price of electricity has gone up 20 per cent. This is after Kenya Power increased the fuel cost charge to Sh6.8 per unit of electricity from Sh4.63, and the foreign exchange adjustment to Sh1.37 per unit from 73 cents per unit.

This will see a consumer spending Sh100 get 5.19 units down from 6.27 units of electricity previously.

In announcing the fuel prices yesterday, the Energy and Petroleum Regulatory Authority (Epra) said the government had started eliminating petroleum subsidies.

"Taking into account the weighted average cost of imported refined petroleum products and inline with government policy to progressively remove subsidy on petroleum products, the changes in the maximum allowed petroleum pump prices in Nairobi are as follows - super petrol, diesel and kerosene increase by Sh20.18 per litre, Sh25 per litre and Sh20 per litre respectively," said Epra in a statement.

The regulator announced the prices for the September-October pricing cycle late last night, after day-long meetings where government officials and industry players haggled over whether to retain the subsidy or do away with it.

Lower cost of crude oil over the last month helped minimise the impact of the withdrawal of the subsidy, with the price of super petrol having been at an all time high of Sh214 per litre without the subsidy.

The higher cost of both fuel and electricity is expected to stoke inflation pressure. The rate of inflation rose to 8.5 per cent in August, the highest since June 2017, on the back of high cost of fuel and food.

President William Ruto on Tuesday made it clear his administration's intentions to withdraw the subsidy that has cushioned Kenyans from high cost of fuel since April last year, noting it was a drain on public funds.

He said the government had spent Sh144 billion on the subsidy since April last year, out of which Sh60 billion has been spent in the last four months alone. He noted that government spending on consumption subsidies, such as the fuel and maize subsidy, is unsustainable and indicated that the government would be scrapping them. Retaining the subsidy for the rest of the year would have cost the government Sh280 billion, which Ruto noted is equivalent to the national government's entire development budget.

The president added that subsidies had a way of working against the consumers, instead of benefiting them, including causing artificial shortages. He said the interventions that Kenya had put in place to lower cost of living - including the fuel subsidy - were prone to abuse.

"In addition to being very costly, consumption subsidies interventions are prone to abuse, distort markets and create uncertainties, including artificial shortages of the very products they seek to subsidise," he said.

The International Monetary Fund (IMF) had already demanded withdrawal of the fuel subsidy, arguing that it is unsustainable with little fiscal space for the government. IMF has also cautioned the government from instituting further cuts in price of power noting that the January cut had dented Kenya Power's revenues by Sh26.3 billion over the financial year to June 2022.

The demands by IMF are part of conditions the international lender has set for Kenya to continue accessing finances under a 38-month Sh281.41 billion loan agreement in which Kenya committed itself to stringent economic targets.

IMF in a July report noted that the government had said it would gradually withdraw the subsidy by October, after which consumers would be paying the full price for fuel.

The hike in cost of electricity will see households consuming 200 units a month pay about Sh5,000 on average up from Sh4,370. It will erode the 15 per cent reduction in power costs effected in January this year. The reduction was then seen by many as a campaign tool.

It is, however, unclear how Kenya Power has increased the costs without the regulator - Epra - gazetting the increases in the fuel cost charge (FCC) and the foreign exchange adjustment. Sources said the regulator would gazette the higher charges on Friday.

The two components, which are subject to change every month depending on factors such as cost of fuel and performance of the shilling against the US dollar, have remained constant at Sh4.63 (FCC) per unit and 73 cents (forex adjustment) per unit since January.

They have largely suppressed higher power prices and supported the 15 per cent reduction that former President Uhuru Kenyatta had gifted Kenyans early in the year. Retaining the two components at the same levels was despite higher crude oil prices and a weak shilling.