Copy Kibaki and Uhuru and stop rising fuel cost, experts tell Ruto

Analysts argue that the two leaders were able to tame the high cost of living and despite having turned to fuel taxes to shore up revenues, prices never rose to the record levels being experienced.

They note that the thinking within the Ruto government that the use of fuel is consumptive rather than productive and hence the higher taxes, as well as the attitude that it should not be subsidised or at least given tax reliefs.

During President Mwai Kibaki's era, petroleum products were not subjected to the many taxes as is today. And while President Uhuru Kenyatta introduced a number of them, they resulted in moderate price hikes and he put in place subsidies when prices started going up steeply.

"The game changer when you look at the Kibaki, Uhuru and Ruto administrations is the taxes. During the Kibaki regime, there was no VAT on fuel. Today, it is the biggest component of fuel price. It is one of the major drivers of the high fuel prices," says Dr Patrick Muinde, an economist.

VAT, which was doubled in July to 16 per cent from eight per cent, stands at Sh29 per litre of super petrol or 13.7 per cent of the Sh211.64 retail price.

"Also, the Petroleum Development Levy was 40 cents, but this was increased to Sh5.40 per litre. This may look small but cumulatively they are really driving the price up."

He notes that Uhuru increased these taxes, but at some point brought the subsidy when prices started going up, a different direction from President Ruto's.

"What is shifting between Kenyatta and Ruto was the subsidies. There is perhaps consensus that the subsidies were abused, but it does not mean that subsidies are bad. I think that the challenge for the Ruto administration is that they are interpreting subsidies on fuel as a consumption but it is not," says Dr Muinde.

"Petroleum products are primary materials in production across the board. This cost is not a consumption subsidy, it is a subsidy around production and you would be trying to control the cost of production."

Former National Treasury Cabinet Secretary Henry Rotich says the economy is facing unique local and domestic circumstances compared to his time and requires carefully crafted interventions.

"Unfortunately, the debate on the cost of living/energy has been heavily politicised at the expense of citizens getting the right information," he says.

"Politicians are driving the narrative for political capital. Perhaps the economic team or technicians who are knowledgeable about the situation need to explain to Kenyans in simple terms what the external and domestic challenges are responsible for the current conditions we are facing."

According to him, the oil sector should be free from strict government regulations, while the fuel supply chain should be refined from sourcing to retailing.

XN Iraki, an associate professor at the University of Nairobi's Faculty of Business and Management Sciences, notes that while Kibaki had the advantage of having a strong shilling, he largely let the market forces determine the direction that prices took.

"In the Kibaki and Uhuru era, IMF conditions were muted. They could liberally use subsidies to cushion us against high fuel prices. The taxes, now seen as a major source of government revenue, were moderated by borrowing (even if this has been demonised)," he says.

"The shilling was stronger and that cushioned us against high fuel prices. They let the market to some extent do its work."

But while the shilling worked to their advantage, international oil prices did not, rising to historical highs during Kibaki's time.

It was at his time that crude oil rose to recorded levels at $147 (Sh22,050) per barrel in 2008.

At home, Kibaki's government was dealing with the aftermath of the 2007/2008 post-election violence. The country was also grappling with a large Cabinet after the formation of the coalition government.

Kibaki had earlier in 2002 found an economy that was "wilderness and malaise", as he described in his inauguration speech, growing at a paltry 0.6 per cent.

Despite the difficulties, Kenyans did not experience a sudden spike in fuel and commodities prices.

"When crude was $146, our pump price was Sh80. Now crude is at $90 but our pump price is Sh 211. Problem is the exchange rate, taxes and high premiums under government-to-government (fuel importation deal)," notes former Mandera Senator Billow Kerrow

According to the economist, Ruto government has misplaced priorities, and cutting down on expenditure, trimming taxes, wastage and unnecessary travel will enable the State to save and reduce taxpayers burden.

"If the government wants to really help Kenyans, it should reduce this appetite for revenue," he says.

During the Uhuru tenure, oil prices experienced several spikes. In the years leading up to 2014, oil prices were relatively high, often above $100 per barrel. In his last months as President last year, crude oil prices rallied to $120 per barrel in June. Local pump prices, however, grew at manageable rates, largely thanks to the fuel subsidy.

It was during his years that the government grew an appetite for taxing petroleum products, but analysts note that at no point did the prices surge by Sh30 during one pricing cycle, which is what was experienced by kerosene users last week.

The tax measures range from VAT on fuel that was introduced in 2018 at eight per cent (although its implementation had be postponed since 2013) to the Sh18 per cent litre anti-adulteration levy on kerosene as well as excise duty on kerosene from Sh7.21 to Sh11.37. He also doubled the Road Maintenance Levy to Sh18 per litre of diesel and petrol in 2016 from Sh9 in 2013.

The government in 2020 also increased the Petroleum Development Levy from 40 cents per litre of petrol and diesel to Sh5.40. At the time, the Petroleum Ministry had to calm Kenyans outraged by the hike, explaining that the levy had a price stabilisation component that would be tapped to ease fuel prices whenever they went above a certain threshold.

The taxes that the Uhuru regime put in place perhaps put Ruto's regime at a disadvantage, leaving him little room to wiggle in terms of hiking taxes. Ruto also undid the cushions that the Jubilee government had put in place that subsidised the three petroleum products.

Dr Muinde notes that fuel is too sensitive to leave it at the current price level and that the government will have to consider a way out. This could be through subsidising Kenyans at the pump or reducing taxes.

Over the current pricing cycle, taxes on a litre of petrol stand at Sh79.31 or 37 per cent of the pump price of Sh211.64.

"If we do not go the subsidy way because it is easy to abuse, why not stop collecting the tax? The most sustainable thing they can do is around the review or suspension of the taxes and give consumers relief," he says.

"There is no other way around. And this is not something that the government can wish away, there is no way that the government can be deaf to the cost of fuel... it would be a kind of political suicide.

"The discussion on taxes is the most meaningful we can have even if we have to suspend it for six months. It is not like the government does not have options."

Prof Iraki agrees with the former National Treasury SC that other than the reduction of taxes on petroleum products, the government should reduce its heavy oversight of the industry.

He notes that while regulation is good to ensure fair play and quality, there are instances where the government's strong hand in the sector may be strangling it and increasing barriers to entry.

He also concurs with other economists that subsidising petroleum should not be seen as subsidising consumption.

"Kenya Kwanza can reduce taxes on fuel. it's a major component of price," he says, adding the administration should streamline the supply chain to have a clear view of who does what within the sector.

Rubis Petrol Station along Koinange Street in Nairobi on September 15, 2023. [Boniface Okendo, Standard]

"It should also free the fuel prices and let the market do its work. Why is the government so involved in the fuel market? Let anyone who can import fuel do it, increased supply will lower prices."

The government, he says, should also consider subsidies, noting that even when they do not make economic sense, "they make political sense. If (you are subsidising) fertiliser, why not fuel that everyone uses?"

It is a view held by industry players. Public Service Vehicle (PSV) operators and manufacturers have noted as much, saying many processes that require the use of petroleum products are productive as opposed to consumption that the government has in the past said it would not subsidise.

Edwin Mukabana, chairman of the Federation of Public Transport Operators, last week told The Standard that the state has wrongly lumped PSVs with private motorists in its decision to remove fuel subsidies, noting that public transport is a productive sector that should get support.

"Use of fuel by private motorists is a consumption activity, but in public service, it is a production activity. It needs to be cushioned. It is not right that subsidising fuel is subsiding consumption," he said.

"Public transport service serves the socially excluded such as children, senior citizens, the disabled and the urban and rural poor. It facilitates commercial activities for the hustlers and it is an essential service and therefore a public good like education and health, which should be funded from the exchequer but it is not."

Samuel Nyandemo, economics lecturer at the University of Nairobi, also feels that besides reducing taxes on petroleum products, the government should consider returning the subsidies to cushion Kenyans from the impact of higher fuel prices.

He notes that the government should look at ways of stopping the slide of the shilling.

"The government should work out modalities of reversing the weakening of the Kenyan shilling against the dollar. Currently, the price per barrel is about $90 and hence the government should desist from deceiving Kenyans."

One of the modalities Ruto came up with to tame the weakening shilling was the government-to-government fuel deal. It appeared like a genius move that would lower local demand for the US dollar and save the local currency from a further slide.

Through the deal, state-owned oil firms would supply Kenya petroleum products on credit and the country was supposed to repay after six months. This would reduce demand on the dollar and help in stopping the further weakening of the shilling. The first cargo was procured in March and the first payment to the Gulf international oil companies is expected to be made later this month.

But has the deal delivered on its promise?

While the impact on the retail cost of fuel was not a primary objective of the deal, it was expected to prevent the shilling from further slide, even strengthen it. This would have meant that the country would not be spending more shillings than it is at the moment to import a metric tonne of fuel. This would have reduced shocks such as the one Kenyans were dealt on Thursday.

Six months down the line, the shilling continues to weaken further. Yesterday, the shilling was trading at Sh147 to the dollar compared to Sh133 in April

This implies that the deal has not worked. Government officials, however, say it has and that the shilling would be at a worse position.

The Energy and Petroleum Regulatory Authority says the deal has helped slow down the depreciation of the local currency, arguing that before the G-to-G deal, it was depreciating three per cent on average every month but this has slowed down to one per cent.

"It has eliminated USD spot purchases by about 100 oil marketing companies, which previously created speculative tendencies. USD purchases are now being progressively undertaken by only the LC issuing banks - KCB, I&M and DTB).

"The transaction has now been de-risked and the Financing Parties have enough USD for maturing LCs. The first LC matures on September 25, 2023. Thirty-four cargoes have successfully been delivered under the G to G arrangement assuring security of supply for the country."