The International Monetary Fund (IMF) has backed the government’s change of heart on fuel subsidies amid rising pressure to bring down the high cost of living.
The move was expected to see the government incur the wrath of the IMF, which has disbursed billions of shillings in financing to the new administration but has been against such subsidies.
President William Ruto has, however, dismissed media reports that the government has reintroduced fuel subsidies, saying it is provided for in the law for the government to intervene to stabilise prices whenever there are unintended hikes.
“We are making prudent use of the Petroleum Development Levy, which is provided for in the law,” he said.
And the IMF told The Standard yesterday the move is not against its stringent terms with the Kenya Kwanza government.
“As long as the action taken by the government is financed by the resources accumulated in the Petroleum Development Fund, it does not lead to a breach of the government’s commitments under the IMF-supported programme,” said an IMF spokesperson in response to our questions. The Petroleum Development Fund Act 1991 requires that the fund be used to support a subsidy when fuel prices skyrocket.
The fund is a special scheme created to shield consumers against the high costs of fuel and is supported by the petroleum development levy, which was increased to Sh5.40 a litre in July 2020 from Sh0.40.
IMF conditionalities are aimed at safeguarding its resources by ensuring that the country’s finances will be strong enough to repay the loan.
Failure to follow through with its tough conditions could see a country blocked from further accessing additional instalments of loans from the Washington-based lender.
Analysts have tipped the much-needed conditional bailout packages from IMF and the World Bank to help the Ruto administration avert a potential debt default and economic collapse amidst the prevailing political and economic uncertainty in the country.
But the bailouts have strings attached, including strict austerity plans such as a controversial public sector pay freeze, increased taxes and the removal of subsidies on fuel and other key commodities.
In its latest price review, the energy regulator retained fuel prices at Sh194.68 for petrol, Sh179.67 for diesel and Sh169.48 for kerosene for the August-September pricing cycle, explaining the government had stepped in to cushion consumers.
“In order to cushion consumers from the spike in pump prices as a consequence of the increased landed costs, the government has opted to stabilise pump prices for the August-September 2023 pricing cycle,” said the Energy and Petroleum Regulatory Authority (Epra) in a statement on Tuesday evening.
“Oil Marketing Companies (OMCs) will be compensated from the Petroleum Development Fund (PDF),” it said.
IMF was against the fuel subsidy instituted by the previous Jubilee regime, terming it “regressive and unsustainable.”
It has maintained that any form of subsidies must be more “targeted” to benefit the poor and not be a drain on State coffers.
Echoing IMF’s sentiments, the new Kenya Kwanza administration had previously also spoken against subsidies.
Rather than targeting assistance to consumers, President Ruto said his government would seek to reduce food production costs and increase output by subsidising inputs such as fertiliser and quality seeds.
Analysts said this week the government’s U-turn is not surprising as allowing consumer fuel prices to swing too much would damage economic confidence, with the fear of inflation slowing productivity.