End subsidies to tame State spend, says World Bank
The World Bank Group headquarters building in Washington, DC, on April 9, 2023. The World Bank has called for the withdrawal of the remaining subsidies to check government spending, even as it threw its weight behind a move by President William Ruto to end the programme on fuel and maize flour.
The World Bank has called for the withdrawal of the remaining subsidies to check government spending, even as it threw its weight behind a move by President William Ruto to end the programme on fuel and maize flour.
Kenya has been subsidising critical production inputs, especially fuel, electricity, fertiliser, and for a brief period last year, on maize flour in a bid to lower prices, and cut the cost of production.
Spend on subsidies rose sharply on record-high fuel prices in 2021 forcing the government to step in and shield consumers.
This saw the government spend some Sh80.7 billion on subsidies in the financial year 2021/22 leading to a strain on State coffers and eroded revenue gains even as it has amassed pending bills owed to oil marketing companies running into billions of shillings.
Subsidies for the fiscal year 2022/23 are budgeted at Sh22.2 billion (0.2 per cent of GDP), but spending on the same in the first nine months of 2022/23 reached Sh43.4 billion (0.3 per cent of GDP) above the yearly target.
After he took office in September last year, Dr Ruto partially withdrew the fuel subsidy and entirely dropped the four-month-long cushion on maize flour at the start of the fiscal year.
State lauded
The World Bank in its latest Kenya Economic Update report has lauded the State for ceasing these subsidies, arguing that the move has created fiscal space and freed up funds for social spending.
“Stable growth in revenue, rationalisation of non-priority spending, and unwinding of fuel and maize subsidies have created fiscal space and enabled the government to safeguard social spending,” said the report. The Head of State in October also ended the nine-month subsidy on electricity, which saw power prices rise for the first time since December 2021.
In last month’s fuel prices review, the government fully withdrew the subsidy on all oil prices, which means fertiliser is the only remaining major production input that is being subsidised.
The World Bank has now called for the Kenya Kwanza administration to drop the remaining subsidies in a bid to ease pressure on the exchequer. “Unwinding consumption subsidies has created some space, but the remaining subsidies and pending bills undermine achieving fiscal targets,” said the lender.
“Persistent pending bills and subsidies continue to undermine the ongoing fiscal consolidation,” it said.
In the supplementary budget for 2022/23, the Treasury added the State Department of Crop Development Sh25.1 billion taking its budget to Sh66.61 billion from original estimates of Sh41.5 billion to cater for the fertiliser subsidy for both the short and long rains planting seasons.
The government has said that its subsidy on fertiliser cut prices from Sh6,500 to Sh3,500 per 50-kilogramme bag helping farmers to access the key agricultural input much more cheaply.
Despite calling for the removal of subsidies to create fiscal space, the World Bank reckons that the fertiliser subsidy has had a positive impact by lowering the cost of producing food.
