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Tougher times loom as Treasury now removes all fuel subsidies

Fuel costs have a direct bearing on inflation, being one of the items in the basket of goods and services whose pricing is tracked to measure the cost of living. [Elvi Ogina, Standard]

Kenyans are staring at tougher economic times after the National Treasury removed remaining kerosene and diesel subsidies in a bid to trim the fiscal deficit.

Kenyans are already reeling under surging food and energy prices.

President William Ruto earlier scrapped the subsidies for petrol and maize flour on September 13 and reduced those for diesel and kerosene, saying they were unsustainable.

The removal of the remaining subsidies will see the cost of diesel, which is used to power commercial vehicles and kerosene, mostly used by low-income homes for cooking and lighting, go up significantly.

“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 the Treasury in the 2022 Budget Review and Outlook Paper.

The Treasury announced the end of the fuel subsidies on a day the International Monetary Fund (IMF) called for their scrapping as part of its lending conditions.

The IMF yesterday also called on Kenya to raise taxes, tighten monetary policy by increasing loan rates and restructure inefficient parastatals such as troubled Kenya Power and Kenya Airways.

Increasing taxes is likely to further burden the already economically strained Kenyans and stoke social tensions at a time President Ruto is facing mounting pressure to address the cost of living in response to his campaign promises.

The “structural adjustment” conditions by the IMF to Kenya are mandatory and tied to securing critical support from the Bretton Woods institution.

Yesterday the IMF board approved the release of Sh53.2 billion to cash-strapped Kenya for budgetary support and the fight against drought, offering a financial lifeline with strings attached to the Ruto administration.

As part of the financial support, the IMF said it expects Kenya to restructure struggling state-owned agencies and broaden the tax base.

This is expected to hit living standards and employment rates at a time surging inflation has eroded incomes.

The planned public sector job cuts could condemn more vulnerable public sector workers to poverty.

This comes as Kenyans continue to grapple with the lingering effects of the Covid-19 pandemic and Russia’s invasion of Ukraine.

“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 as it reiterated the need for scrapping of the subsidies.

Aggressive revenue mobilisation

The IMF also backed Ruto’s plans to embark on an aggressive domestic revenue mobilisation drive to fund the next budget.

The National Treasury said earlier this year that it will introduce several tax policies over the next year in what will be Kenya Kwanza’s first national budget.

This is aimed at raising the needed resources to offset the budget deficit created by a huge public debt.

“An action plan for developing Kenya’s Medium‑Term Revenue Strategy was issued in August 2022,” said the IMF.

“The MTRS will identify tax policy and administrative measures to continue widening the tax base and mobilise domestic revenues while improving fairness in the tax system.”

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

Fuel costs have a direct bearing on inflation, being one of the items in the basket of goods and services whose pricing is tracked to measure the cost of living.

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 9.5 per cent in November.

Diesel is retailing at Sh162 a litre in Nairobi until January 14, 2023, while Kerosene at Sh145.94, according to the monthly prices set by the Energy and Petroleum Regulatory Authority (Epra).

Diesel runs tractors, lorries, agriculture irrigation pumps and captive power generators used in industries.

The economy also uses diesel for electricity generation, meaning that higher prices of fuel automatically result in higher fuel cost charges on power bills.

Producers of manufactured goods are also expected to factor in the higher cost of power in their factories and diesel for the transportation of goods, which are expected to be passed on to the consumer.

Food costs are already elevated due to poor weather conditions and supply constraints, with higher transport charges expected to be loaded onto the final price.

The sustained high inflation has forced many households, especially in the low-income segment, to reduce their shopping basket.

The IMF and the African Development Bank (AfDB) recently asked developing countries like Kenya to strengthen the social safety nets to protect the most vulnerable citizens.

The IMF also signalled more pain for borrowers as it asked the banking regulator to raise its key lending rate.

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