State drops plan to scrap kerosene, diesel subsidies

Kakamega resident line up to buy kerosene at a local petrol station amkid shortage crisis.[Benjamin Sakwa, Standard]

The government has signalled a U-turn on ending the fuel subsidies amid rising pressure to bring down the high cost of living.

Treasury says it will buttress the fuel prices stabilisation mechanism through legal reforms, marking a departure from an earlier plan to remove the kerosene and diesel subsidies in a bid to trim the fiscal deficit.

"In order to stabilise consumer prices against unpredictable swings in global oil prices, the government will set up a legal framework to ring-fence the Fuel Stabilisation Fund," revealed Treasury in its 2023 Budget Policy Statement published on Wednesday.

Analysts said the intention is not surprising as allowing consumer fuel prices to swing too much would damage economic confidence, with the fear of inflation slowing productivity.

"The government will then lose revenue anyway. Sometimes protecting the subsidy is actually the lesser evil," said Deepak Dave of Riverside Capital Advisory.

President William Ruto 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 would have seen the cost of diesel, which is used to power commercial vehicles and kerosene, used mainly by low-income homes for cooking and lighting, go up significantly.

The Treasury has, however, been subsidising diesel and kerosene for four months in a row.

"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 earlier in the 2022 Budget Review and Outlook Paper.

Fuel prices are unchanged over the next month, according to new guidelines published by the Energy and Petroleum Regulatory Authority (Epra) on Tuesday evening.

Super petrol will retail at Sh177.3 per litre in Nairobi, diesel at Sh162 and kerosene at Sh145.94 in the period.

This the fourth month in a row that Epra has retained pump prices at the same level and is despite the reduction in the cost of petroleum products in the global market.

Petrol users will continue subsidising the diesel, Epra said, while kerosene will be subsidised through money from the Petroleum Development Levy Fund.

"In the period under review, the maximum allowed petroleum pump for super petrol, diesel and kerosene remain unchanged," said Epra in a statement.

"The price of diesel has been cross-subsidised with that of super petrol, while a subsidy of Sh19.41 per litre has been maintained for kerosene in order to cushion consumers from the otherwise high prices. The government will utilise the Petroleum Development Levy to compensate oil marketing companies for the difference in cost."

Restless Kenyans want the new administration to put measures in place to shield consumers and companies from the full impact of surging energy and food costs.

President Ruto faces the dilemma of trying to reduce the fiscal hit from vast subsidy bills on strained public finances placed by the previous government and the need for economic reform amid the risk of rising discontent and social unrest if the economic situation gets worse.

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