Ruto's Sh26b cheap power dilemma as cost of living crisis rages

The 15 per cent electricity cut from January to December was based on a subsidy by the government and contributions by energy sector players. [Caleb Kingwara, Standard]

President William Ruto faces the dilemma of whether to retain the cheap electricity subsidy placed by his predecessor Uhuru Kenyatta that cost the taxpayers Sh26 billion over a one-year period.

Financial Standard has learned the cheap power plan saw power utilities and the National Treasury under former President Kenyatta’s regime contribute Sh26 billion to shield Kenyans from the high cost of power.

This is even as Ruto’s administration continues to argue against subsidies, an indicator that a 12 per cent tariff hike sought by Kenya Power could sail through even as power consumers continue to bear the brunt of higher oil prices and a weak shilling.

The former administration placed the cushion programme amid social tension and pressure following a cost-of-living crisis that continues unabated to date.

Similar pressure is facing the current administration of President Ruto, who was elected on a platform of addressing the runaway cost of living.

“The government contributed Sh14 billion and the sector players contributed Sh12 billion to cushion Kenyans,” Kenya Power acting Chief Executive Geoffrey Muli revealed recently underlining the financial burden of shouldering the electricity cuts by the energy utilities and the National treasury.

The 15 per cent electricity cut from January to December was based on a subsidy by the government and contributions by energy sector players. They included Kenya Power, Geothermal Development Company (GDC), Kenya Electricity Transmission Company (Ketraco), and Kenya Electricity Generating Company (KenGen).

Financial Standard has learned that the cash-strapped energy utilities are against the idea of extending the subsidy as they fear further straining their finances at a time the National Treasury had adopted a similar stance against subsidies.

For instance, Kenya Power remains in the red with negative working capital, with liabilities at Sh110.43 billion, exceeding its current assets at Sh54.69 billion over the year to June 2022. “The commitment for contribution from these sector players and the National Treasury was from January to this month (December). What is likely to come up is guidance from the Ministry and the regulator on how we proceed from there going forwards,” Mr Muli told Financial Standard in an interview last week.

“As to whether it is sustainable or not, of course when you are told to contribute, you contribute out of money that you needed to plough back to make electricity more reliable, to maintain your equipment, and to support the business.”

President William Ruto’s administration is facing mounting pressure to address the high cost of living.

After his swearing-in on September 13, he undertook to tackle the prevailing high cost of living even as he admitted that some State subsidies, including the fuel subsidy, may have to go.

Dr Ruto was sworn-in against the backdrop of record prices in fuel, maize flour and other basic commodities.

Even then, the new administration has been taking cost-cutting steps to reduce its budget deficit. To gain multi-billion loan deals with the International Monetary Fund (IMF) and the World Bank, the government has recently scrapped subsidies on fuel and maize, saying there are unsustainable.

The IMF had demanded that the State do away with fuel and maize subsidies, arguing they are “unsustainable” with little fiscal wiggle room for the new government. This was part of the conditions the international lender has set for Kenya to continue accessing finances under a 38-month Sh281.41 billion loan agreement in which the Treasury committed itself to stringent economic reforms.

Ruto removed fuel subsidies on September 13 when he was sworn into office, in a bid to trim the fiscal deficit, saying they are unsustainable.

The Head of State has admitted that the subsidy programmes have been fraught with many challenges, including artificial shortages of fuel and maize flour, besides being a burden to the Exchequer.

On the fuel subsidy, President Ruto revealed taxpayers have spent Sh144 billion since it was introduced, out of which Sh60 billion has been spent in the last four months alone. The maize subsidy, on the other hand, gobbled up Sh7 billion in one month. “If the fuel subsidy continues to the end of the financial year, it will cost taxpayers Sh280 billion equivalent to the entire national development budget,” said President Ruto.

In addition to being very costly, he said the consumption of subsidy interventions is inefficient and prone to abuse as was witnessed with the maize flour subsidy introduced in the run-up to the August 9 polls that saw the price of a two-kilo (2kg) packet of unga fall from a record Sh210 to Sh100.

But the reform of Kenya’s hefty subsidies has hurt consumers. 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.

Latest data from the Kenya National Bureau of Statistics show that inflation slowed to 9.5 per cent in November from 9.6 per cent in October on the back of a sharp increase in the prices of essential commodities. The sustained high inflation has forced many households, especially in the low-income segment to reduce their shopping basket.

As the cost of living crisis rages on, Kenyans are bracing themselves for a tough Christmas and New Year holidays trading period as hard-pressed consumers and revellers react to a worsening cost of living crisis by cutting back on spending.

With the most profitable period of the year for shops and online outlets approaching, one survey underlined the extent of the squeeze on household budgets caused by Kenya’s near double-digit inflation rate.

President Ruto’s government faces the uphill task of stabilising government finances and bringing the cost of living under control as unprecedented levels of inflation hurt consumers globally.

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