CBK: Brace for tough times over fuel and Ukraine war

Kenyans should brace for tough times ahead after Central Bank of Kenya (CBK) Governor Patrick Njoroge hinted that the fuel subsidy programme might be cut.

Speaking during a press briefing yesterday morning, Dr Njoroge said he expects the subsidy, which has shielded motorists from the spike in the price of petroleum products, to stay with the government picking up a “significant burden.”

“But I think, more importantly, it may not be at 100 per cent. There may be some sort of adjustments,” he said in his post-Monetary Policy Committee (MPC) press briefing.

This means that Kenyans will soon be paying even more for fuel, with a litre of petrol currently retailing at a record Sh131.63 in Nairobi even as fuel shortage hits parts of the country.

Without the fuel subsidy, the pump prices would be above Sh150 per litre.

Crude oil

Besides the effects of the Covid-19 pandemic, the Ukrainian crisis has also aggravated the oil situation around the world with a barrel of crude oil now selling at over $100 (Sh11,400), which Dr Njoroge said is “completely beyond the realm of understanding”.

The governor also fears that if the subsidy is left to go on for long, Kenyans might be hooked on the cheap oil, which would make it difficult to withdraw from the programme.

Subsidies, economists argue, tend to introduce inefficiencies in the market.

The International Monetary Fund (IMF) has already warned that Kenya’s fuel subsidy is poorly targeted and leads to inefficient allocation of resources with the main beneficiaries being those who are better off.

“This happens as energy products have a higher share of the budget among high-income groups,” said IMF Representative in Kenya Tobias Rasmussen in a statement in February.

Dr Njoroge wants the subsidy discontinued as fast as possible.

But until then, he wants the advanced economies to take action to lower the price of crude oil.

“The action they (advanced countries) take will allow Kenya to withdraw the subsidy at the right time,” he said.

Cost of living

Fuel contributes significantly to the country’s cost of living as it is an integral input in the production of a lot of goods and services, including manufactured goods, transport and farm produce.

While the global price of crude oil, which is refined into petrol, diesel and kerosene, has been going up the government has absorbed some of the stings by paying oil marketers their foregone margins.

There are concerns that the government subsidy is not sustainable, especially as the price of crude oil keeps rising due to the impact of the war in Ukraine.

Russia is a major producer of oil, but with its invasion of Ukraine and subsequent sanctions against it by Western nations, its supply to the global market has dropped, leaving a shortfall that has resulted in a price hike.

The price of Murban oil price rose by 13.7 per cent to $116.86 (Sh13,416) per barrel on March 24 compared to $102.76 (Sh11,797) per barrel on March 17, CBK data shows.

There are also controversies surrounding the fuel subsidy, with oil marketers insisting that the government owes them Sh32 billion.

However, the government insists that the pending bill is Sh13 billion and is for one-and-a-half months. The money, the government says, is being processed.

By yesterday, there were reports that some areas were experiencing fuel shortages with some analysts attributing it to hoarding.