End of subsidy to usher in expensive petrol era

Motorists fuel at Total filling station on Kimathi Street

Motorists fuel at Total filling station on Kimathi Street in Nairobi on June 14, 2022.  The era of expensive fuel is in the horizon after Treasury announced plans to scrap a subsidy programme in a bid to ease pressure on the country’s budget.

Photo credit: Dennis Onsongo | Nation Media Group

The era of expensive fuel is in the horizon after Treasury announced plans to scrap a subsidy programme in a bid to ease pressure on the country’s budget.

Treasury Cabinet Secretary Ukur Yatani said continuation of the kitty could imperil Kenya’s plans to cut debt accumulation prompting the push to remove it in the fiscal year starting next month.

Kenya has used the fund to cushion consumers in the wake of a global rally in crude prices since last year with the government allocating over Sh100 billion for the programme in the 2021-22 and 2022-2023 financial years. Mr Yatani said discontinuation of the subsidy will free up funds to subsidise fertilisers and lower costs for farmers, support the universal healthcare as well as free primary education initiative.

Escalate public debt

“The cost of fuel subsidy could eventually surpass its allocation in the national budget thus potentially escalating public debt to unsustainable levels and disrupting the government’s plans to reduce rate of debt accumulation,” Mr Yatani said.

“For this reason a gradual adjustment in domestic fuel prices will be necessary in order to progressively eliminate the need for the fuel subsidy, possibly within the next financial year.”

Treasury’s plans to scrap the subsidy comes a day after the Energy and Petroleum Regulatory Authority (Epra) increased pump prices by Sh9 pushing the cost of diesel, super and kerosene to new highs.

A litre of super and diesel now costs Sh159.12 and Sh140 in Nairobi respectively while a litre of kerosene rose to Sh127.94.

Prices without subsidy

Without the subsidy, prices would have been Sh184.68 and Sh188.19 per litre of super and diesel respectively while kerosene would be selling at Sh170.37 per litre.

This marked the third monthly review that Epra has increased pump prices amid depletion of the kitty in the wake of the global rally in crude prices. The fund had kept pump prices unchanged from November last year to March, highlighting the critical role of the subsidy in protecting Kenyans from high pump prices and ultimately a spike in the cost of living.

Kenya’s economy is diesel-driven and manufacturers, farmers, transporters and other service providers factor in the increased cost of fuel leading to increased costs of goods and services.

Depleted several times

The subsidy kitty that is supported by the Petroleum Development Levy has been depleted several times since last year due to sharp increase in compensation margins to oil marketers.

Kenya will in the monthly review ending July 14 pay oil marketers the highest subsidies per litre of the three fuels highlighting the impact of the spike in global prices of crude.

Compensation will be highest for diesel with a litre at Sh48.19, Sh42 per litre of kerosene and super at Sh25.56.

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