State mulls pulling the plug on fuel subsidies as funds run out


Attendant at work at Rubis fuel station along Koinange Street in Nairobi. [Boniface Okendo, Standard]

The fuel subsidy that has kept prices stable for the last one year is not sustainable and the government will at some point have to pull the plug on the programme.

This is likely to leave consumers exposed to an even higher cost of fuel, with the cost of crude oil having been going up that adds to the high petroleum tax regime locally.

The fuel stabilisation programme draws funds from the Petroleum Development Levy (PDL) but the Ministry of Petroleum and Mining now says the money it has been spending to keep prices stable does not match the collections from the levy.

Petroleum and Mining Principal Secretary Andrew Kamau told the National Assembly’s Energy Committee that the programme is not sustainable. He, however, did not give timelines on how long the State will continue implementing the programme.

“The huge difference between the stabilised prices and the actual prices compared to the collections from the PDL present a challenge to the continued use of the PDL,” he said on Tuesday at a meeting with the committee.

According to the ministry, PDL collections reached Sh26.6 billion in the financial year to June 2021. Over the current financial year ending June 30, it has collected Sh19.2 billion.

The money is, however, nearly exhausted with the balance as at February this year being only Sh1.3 billion.

The levy, which consumers pay at the pump, was raised in July 2020 to Sh5.40 per litre of super petrol and diesel from 40 cents a litre, resulting in increased revenue.

The Sh26.6 billion collected in the year to June 2021 is in comparison to Sh4.5 billion collected over a similar period in 2020.

The collections, which average about Sh2.2 billion per month, are not commensurate with what the government spends in keeping the prices stable.

Kamau told the MPs that there are some months that the ministry spends Sh8 billion in the fuel stabilisation programme.

The National Treasury in the Supplementary Budget tabled in Parliament early February allocated Sh25 billion for the subsidy, ensuring that it will continue cushioning the prices for the next few months. 

While the current pump prices are high, they are nowhere near the levels that they should be, at least according to computations by the Energy and Petroleum Regulatory Authority (Epra).

Due to the fuel subsidy, super petrol is currently cheaper by Sh14.53 per litre, retailing at Sh129.72 a litre in Nairobi rather than Sh144.25 per litre, which according to Epra, should be the actual price in the absence of the stabilisation.

Diesel, the fuel heavily used by industries such as transport, is the largest beneficially of the kitty, with the stabilised pump price being Sh110.60 a litre in Nairobi against the actual price of Sh133.89, a difference of Sh23.29.

Kerosene has been subsidised by Sh15.88 per litre and would have retailed at Sh119.42 per litre against the current pump price of Sh103.54 per litre in Nairobi.

The plan to stop stabilising fuel prices is coming at a time when crude oil  prices have been on a rally. Global oil prices have recovered from lows of $17 (Sh1,921) per barrel in April 2020 after Covid-19 restrictions resulted in drop in demand and prices falling.

The price increased to $65 (Sh7,345) per barrel in March 2021 and $82 (Sh9,266) per barrel in January. It has further gone up to $92 (Sh10,396) and is projected to hit $100 (Sh11.300) in the coming months.

While the money collected through the PDL is running low, MPs have in the past raised concerns after finding that not all the money is spent on cushioning Kenyans from the high cost of petroleum products.

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