Move to stabilise petroleum prices is welcome but more should be done

The Covid-19 pandemic exposed traders to numerous challenges with many businesses collapsing. Sadly, fluctuating fuel prices negate its struggle to support sustainability of the sector.

It is soothing to see the government acknowledge that the economy is being eroded by high energy prices and focusing on establishing a framework for stabilising petroleum prices.

In his Mashujaa Day speech, President Kenyatta said the government intends to cushion Kenyans against the turbulence of unstable fuel prices. It is hoped that the report by the taskforce set up for the purpose will provide solutions that will be fully implemented.

Early this year, subsidies on petrol, diesel and kerosene were temporarily introduced to ease the surging cost of living by cushioning Kenyans from high costs of production and transport and increased prices of goods and services. Their scrapping from September 15 was a nightmare to many Kenyans. This led to demonstrations with calls to the government to lower the prices. The October 14 reduction of fuel prices by the Energy and Petroleum Regulatory Authority (Epra) that should lapse on November 14 was celebrated by many, though there were mixed reactions as some Kenyans demanded even lower rates.

Epra reduced the maximum pump prices in Nairobi for super petrol and diesel by Sh5 per litre and that of kerosene by Sh7.28 a litre.

“TradeMark East Africa Report 2021” shows Tanzania, followed by Uganda, has the lowest pump fuel price levels in the six-member East African Community, giving its motorists some flexibility on spending.

Kenya Civil Society Platform on Oil and Gas (KCSPOG) reports show Kenya has higher super petrol and kerosene prices than the other East African nations of Ethiopia, Uganda, Rwanda and Tanzania and the third-highest for diesel after Rwanda and Uganda.

KCSPOG cautions that low confidence in Kenya’s oil and gas sector is held down by factors like the stalling of mid-stream and down-stream projects such as commencement of the Kisumu Oil Jetty, unresolved tax disputes with some international oil companies, and mounting concern on the socio-environmental impact of oil sector activity.

This has caused human displacement, land alienation, pollution and poor waste management. Other outcomes include a shift towards renewable energy use and climate change protection and reprioritisation in government spending, coupled with heightened risk aversion among foreign investors.

The spike in the price of oil has deleterious effects on the economic and socio-environmental frontiers. Past significant oil price increases have led to worldwide economic recessions, such as the 1973 and 1979 energy crises. Costly fuel is likely to dim Kenya’s industrialisation dream articulated in the manufacturing pillar of the ‘Big Four Agenda’.

Secondly, the policy incoherence regarding raising revenues is highly palpable in the way oil prices are arrived at as taxes and levies account for 45 per cent of the pump price, on average, in a bid to plug budgetary deficits.

Studies on developing nations, particularly in Africa, aver that oil price shocks can be mitigated by reducing and even eliminating taxes. The tools available for Epra include tax reductions and subsidy increase. It’s a high time it mobilised a fund that incorporates private-sector players in the form of bonds. The purpose of this instrument will be absorption of risks associated with fluctuation in an attempt to stabilise prices. The resultant certainty in energy costs will favourably endear the country in ease of doing business.

There is also a need to boost the fuel subsidy fund to give it a larger shock-absorbing capacity over many price ranges. The fund should be ring-fenced to protect it from encroachment through alternative budgetary needs, including by piling more layers and enforcing a higher threshold for it to be diverted for other uses.

 Lastly, Epra, in compliance with the general principles, should allow an open market to induce competition and delimit the price intercepts by the government.

Mr Matonda is the CEO, Kenya National Chamber of Commerce and Industry. 

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