With polls done, you can as well kiss State subsidies goodbye

A shopper buys subsidised maize flour at a supermarket in Nakuru. ]Harun Wathari, Standard]

The prices of essential commodities such as maize flour, cooking oil and petroleum products have hit record highs this year.

Kenyans have as a result had to dig deeper into their pockets to meet their daily needs, but it could have been worse were it not for government subsidies.

The Central Bank of Kenya’s (CBK) Monetary Policy Committee (MPC) in late July noted that while there was an increase in the rate of inflation over the recent months, the increase was moderated by measures implemented by the government to stabilise fuel prices, lower electricity tariffs, and subsidise fertiliser prices.

Inflation rose to 8.3 per cent in July, up from 7.9 per cent in June.

Other measures that CBK noted had softened the blow of high prices included a waiver on import duties for maize and the subsidy on retail prices of sifted maize flour as well as a recent reduction in VAT on LPG (liquefied petroleum gas) to eight per cent from the standard 16 per cent.

The subsidies, however, face an uncertain future as the electioneering period comes to an end, with the politicians now not keen to continue with the government’s largesse seen over the past months in the hunt for votes.

Spending money to ease the burden of the cost of living for Kenyans has also been an unsustainable venture for the government that has numerous competing and pressing issues to deal with.

Cracks in the implementation of the maize flour subsidy started emerging last week when millers started grumbling about how the programme is being undertaken.

The millers are particularly discontented with the processing of payments and are so far owed more than Sh1 billion by the State.

Twice, there has been conflicting information about the suspension of the programme, the most recent being on Saturday when it was reported that the Agriculture Ministry had suspended the programme only for Cabinet Secretary Peter Munya to later deny the reports.

Misgivings about the programme, especially among millers are not entirely unfounded. Some of them burnt their fingers five years ago in a similar deal with the State.

In the run-up to the 2017 polls, the State put in place a similar programme that brought down the price of a 2kg packet of maize flour to Sh90 from Sh160, which was also a record high at the time.

Disclosures by listed miller Unga Ltd in its annual report indicate that the company was only paid last year for maize grain it supplied in support of the 2017 subsidy programme.

This time around, the programme has over the last couple of weeks brought down the price of a 2kg packet of unga from upwards of Sh210 to Sh100, with the government compensating the millers the about Sh100 difference.

The subsidy programme has also been characterised by stockouts of the vital commodity in many retail outlets across the country.

This has been attributed to panic buying as Kenyans went to the polls, but millers have also been cautious not to burn their fingers.

The Agriculture Ministry has also cut the budget allocated towards the programme, from an initial Sh8 billion to Sh4 billion. And with the National Treasury short of funds, Kenyans might soon have to grapple with higher unga prices. The government is also set to kill the fuel subsidy, having initially set a timeline of October this year.

Treasury has struggled to secure funds for the petroleum stabilisation programme amid other pressing needs, such as the prevailing drought in many parts of the country and elections.

It has also been under pressure from the International Monetary Fund (IMF) to move away from subsidies, with the Bretton Woods institution singling out the fuel subsidy as one that needs to go.

The subsidy has cushioned Kenyans from high pump prices since April 2021, in which the State has so far spent Sh101.85 billion. Doing away with it will deal a major blow to Kenyans, with fuel being a key component of production as well as moving people and goods around.

 Costly affair

IMF, in a July report, noted that retaining the subsidy would continue to be a costly affair for the government as it would spend Sh119 billion over the current financial year.

This is Sh19 billion more than the Sh100 billion the government planned to spend on account of higher crude oil prices.

In arguing against subsidising areas such as fuel, IMF has in the past pointed out that lowering the cost of certain products offers benefits to a few Kenyans as opposed to benefitting the masses.

“The authorities intend to continue gradually realigning domestic to global fuel prices in the 2022/23 financial year so as to eliminate the fuel subsidy by October 2022,” said IMF in its report last month. The report follows a review of the progress that Kenya has made in instituting several policy changes, which were part of conditions tied to an extended credit facility by the IMF.

The three-year $2.34 billion (Sh276 billion) facility that was rolled out early last year was expected to help Kenya’s recovery efforts from the effects of Covid-19 as well as reduce debt vulnerabilities.

Funds are disbursed periodically in Kenya meeting the conditions. So far, IMF has released $1.208 billion (Sh142 billion). It, however, said the vulnerable segments of society might continue to enjoy a level of subsidy.

This could mean that Treasury might to some extent continue subsidising kerosene, which is largely used by the poor for lighting and cooking, and possibly diesel, which is used in production processes as well as by the transport industry.

“The Kenyan government is in the process of reviewing the country’s fuel pricing formula… the review should assess the impact on the vulnerable for whom the mission advised extending more targeted a support programme,” said IMF.

The State has in the past explained how much of a strain the fuel subsidy has been on the public coffers and why it is unsustainable.

Treasury is supposed to take funds to stabilise petroleum products from the Petroleum Development Levy (PDL) Fund, which is funded by motorists by paying Sh5.40 per litre of diesel and super petrol that they consume.

Collections from the levy stood at Sh26 billion for the year to June 2021, translating into about Sh2 billion per month. This is in comparison to the spending, which stood at Sh101.85 billion over the period between April last year when the State started cushioning motorists to July this year.

This would translate into a monthly spend of Sh6.3 billion over 16 months.

Power prices

Over the July-August fuel pricing cycle, the government subsidised a litre of petrol to the tune of Sh50 and Sh53 for diesel and kerosene. The 15 per cent reduction in power prices that was effected early this year also faces an uncertain future.

The tariff, which was gazetted by the Energy and Petroleum Regulatory Authority (Epra) in January, will be in place until December, meaning it will mean another tariff review.

With the 2022 elections out of the way, a tariff review could go either way. This is particularly considering the dent that the tariff has had on Kenya Power, which appears to have solely borne the impact of the price reduction.

The impact was expected to be spread across other power agencies.

The price cut is expected to see Kenya Power suffer revenue losses to the tune of Sh26.3 billion, according to a recent IMF report, further complicating the company’s turnaround plans.

“The tariff reduction has aggravated KPLC’s (Kenya Power and Lighting Company) pre-existing liquidity challenges by lowering revenues by an estimated Sh26.3 billion per annum, while additional cost-saving measures currently identified across the electricity supply and distribution chain would only yield benefits over time and are not sufficient to fully offset this revenue impact,” said IMF in the report. The Washington-based institution warned the State against further cuts in power prices unless backed by a verifiable reduction in costs within the sector.

“Any future reduction in electricity tariff should be avoided unless fully backed by well-identified and achievable cost-saving measures to prevent deterioration of KPLC’s liquidity and profitability situations,” said IMF, which means the government is unlikely to implement the remaining 15 per cent cut that it had promised Kenyans.

The revenue loss, according to the National Treasury’s disclosures to IMF, would be covered by cost-cutting measures by Kenya Power as well as Treasury advancing some Sh14.1 billion over the two financial years to June 2023.

Kenya Power has already received Sh7.05 billion for the year to June 2022. Treasury plans to give the firm another Sh7.05 billion over the current financial year that ends in June 2023.

The authorities have also been artificially suppressing variable components of the power bill that would have otherwise gone up and, in turn, seen an increase in power prices.

Components of the power bill such as the fuel cost charge (FCC) and the foreign exchange adjustments have remained constant since January.

This is despite indications such as higher crude oil prices and a weak shilling that they should have gone up. The two components of the power bill tend to determine the direction that electricity bills take on any given month.

Epra has the leeway to review them up or down or retain them at the same levels every month, depending on such factors as oil prices and how the shilling swings against the US dollar.