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Kenya risks IMF wrath after Ruto's retreat on fuel subsidy

By Brian Ngugi And Henry Githaiga | 3mos ago | 3 min read

A fuel pump assistant fueling a vehicle at a petrol station along Kenyatta Avenue, Nairobi. [Edward Kiplimo, Standard]

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

The move could see the government incur the wrath of the International Monetary Fund (IMF), which has disbursed billions of shillings in financing to the new administration but has been against such subsidies.

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.

The Standard had not gotten a comment from IMF by press time on the government’s latest decision to reinstitute the fuel subsidy.

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, 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.

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“Oil Marketing Companies (OMCs) will be compensated from the Petroleum Development Fund (PDF),” it said.

The IMF has been 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 yesterday 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.

Tighter supply driven by oil output cuts from oil-producing nations under OPEC and its allies, together known as OPEC+, and rising global demand have underpinned a rally in oil prices, posing a fresh political and economic headache for the Kenya Kwanza administration. This comes as 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.

It has since emerged the President was pushed to make a tough choice between keeping his promise not to subsidise fuel or cushioning Kenyans against the impact of higher fuel prices.

The decision was further complicated by an eight per cent increase in value-added tax (VAT) on fuel through the Finance Act 2023.

The Act came into effect on July 1, pushing up the price of petrol by Sh13.49, that of diesel by Sh12.39 and kerosene by Sh11.96 per litre in Nairobi. Sources privy to discussions between Epra, oil marketers and the Ministry of Energy told The Standard that increases in global fuel prices were set to push up fuel prices by Sh7.33 for super petrol, Sh3.59 for diesel and Sh5.74 for kerosene.

This would in effect push up the cost of petrol in the capital to Sh202.98, squeezing Kenyans harder. The cost of diesel was set to go up to Sh183.26, while kerosene was to go up to Sh175.22.