IMF now seeks transparency on Kenya's 'regressive' fuel subsidy

The government in February signalled a U-turn on ending the fuel subsidies. [Caleb Kingwara, Standard]

The International Monetary Fund (IMF) has called for greater transparency on the use of fuel subsidies by the government.

This came as the IMF warned that the subsidies remain a drain on the cash-strapped Exchequer and should be scrapped.

"With Kenya, I think what we're asking is that whatever the subsidies the government wants to pursue, that it's put on budget and made transparent," said the IMF African Department director Abebe Aemro Selassie on Friday last week.

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

Treasury at the time said it would buttress the fuel prices stabilisation mechanism through legal reforms, marking a departure from an earlier plan to remove the kerosene and diesel subsidies in a bid to trim the fiscal deficit.

President William Ruto's government, like its predecessor, has turned to IMF for crucial budgetary support to alleviate a biting economic crisis.

IMF had been against the fuel subsidy instituted by the former Uhuru administration, terming it regressive.

It has maintained that subsidies must be more "targeted" to benefit the poor and not be a drain on State coffers.

Selassie reiterated in an interview with journalists that the retention of the subsidies by Kenya is "regressive" use of government spending.

"Regressive meaning that the benefits of such subsidies tend to accrue to richer segments of society a lot more than poorer segments of society; and, in a world where we still have elevated levels of poverty, elevated levels of development challenges, I'm not sure that this is best use of resources," he said in response to a question about the subsidies.

"And then we leave it up to the government, whether to sustain those policies or remove them, but what we ask.

"I think what is important is that the cost of this fuel subsidy is, rather than being left as a contingent liability and off-balance sheet, is included in regular appropriation process so that the tradeoffs that the government is making is being clear."

He said the extent of the fuel subsidies by various governments also varies with international market prices.

"So, that influences the timing of when governments remove or put or sustain fuel subsidies."

President Ruto scrapped the subsidies for petrol and maize flour on September 13 and reduced those for diesel and kerosene, saying they were unsustainable.

"On fuel subsidy alone, the taxpayers have spent a total of Sh144 billion, a whopping Sh60 billion in the last four months," he said during his inauguration on September 13.

"If the subsidy continues to the end of the financial year, it will cost the taxpayer Sh280 billion, equivalent to the entire national government development budget."

The National Treasury has, however, subsidised diesel and kerosene for several months in a row.

Analysts had said the move is not surprising as allowing consumer fuel prices to swing too much would damage economic confidence, with the fear of inflation slowing productivity.

"The government will then lose revenue anyway. Sometimes protecting the subsidy is actually the lesser evil," said Deepak Dave of Riverside Capital Advisory at the time.

Removal of the remaining subsidies would have seen the cost of diesel, which is used to power commercial vehicles and machinery, and kerosene that is used mainly by low-income homes for cooking and lighting, go up significantly.

Fuel prices are unchanged over the next month, according to new guidelines published by the Energy and Petroleum Regulatory Authority last week.

Restless Kenyans want the government to put measures in place to shield consumers and companies from the full impact of surging energy and food costs.

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.