Return of the fuel subsidy

A pump operator fuels a motorbike at a petrol station in Nairobi. [Edward Kiplimo,Standard]

Barely a year after taking office, President William Ruto continues to face tough economic choices with Kenyans looking to the government to lower the cost of living.

The latest is that the President has been pushed to make a tough choice between keeping his promise not to subsidise fuel or cushion 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.

Sources privy to discussions between the Energy and Petroleum Regulatory Authority (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 Nairobi to Sh202.98, just above the Sh200 psychological mark.

The cost of diesel was set to go up to Sh183.26 while kerosene went up to 175.22.

According to Epra, the increase was as a result of higher international prices with the landed cost of petrol up 6.84 per cent, that of diesel by 4.29 per cent and kerosene up 7.41 per cent.

In its latest price review, however, Epra retained fuel prices at Sh194.68 for petrol, Sh179.67 for diesel and Sh169.48 for kerosene.

"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 to September 2023 price cycle," said Epra in a statement.

"Oil marketing companies (OMCs) will be compensated from the Petroleum Development Fund (PDF)."

Oil marketers were said to have been against the subsidy as it has generated over Sh45.8 billion in unpaid debts to the sector.

The debt, which was carried over from the last administration, has seen the government float two bonds to meet its obligations with taxpayers set to incur an additional cost of 14.22 per cent in interest payments.

This is in addition to the over Sh124 billion already paid out to OMCs since April 2021 when the subsidy was introduced.

"While the government has reassured the industry that the funds will be paid through the bonds, it makes no sense for the government to revive the subsidy and generate an additional debt," the source said.

"In the end, it is taxpayers who will end up losing out as the 14.22 per cent interest on Sh45.8 billion in bonds equates to nearly Sh6.5 billion in interest payments."

Despite the subsidy, Kenyans will continue to pay higher fuel prices with taxes accounting for 39.37 per cent of the cost of fuel.

The landed cost of a litre of petrol is Sh107.99 with taxes adding a further Sh76.65 to the cost of fuel, while distribution and storage account for Sh3.97 with the oil marketers receiving a margin of Sh6.07.

On the other hand, the landed cost of a litre of diesel is Sh102.97 with taxes adding Sh63.83 to the cost while distribution and storage accounts for Sh3.60. Oil marketers get a margin of Sh9.27.

The landed cost of kerosene is Sh101.15 with taxes adding Sh57.34 to the cost while distribution and storage accounts for Sh3.58, and OMC gets a margin of Sh7.41.