MPs allocate Sh25bn for fuel subsidy as pump prices set to skyrocket 

Members of Parliament have proposed to allocate Sh25 billion to the Ministry of Petroleum to bolster the fuel subsidy kitty even as the government braces for a record rise in local pump prices.

The invasion of Ukraine by Russia on Thursday — that was precipitated by simmering tensions between the two Eastern European neighbours — has sent global crude oil prices higher, setting the stage for a historic increase in fuel prices at the pump in the next monthly prices reviews unless the government once again intervenes. 

The National Assembly’s Energy Committee has now stepped in and proposed a Sh25 billion allocation for the fuel subsidy in the revised budget which would significantly bolster the fund that has been running dry.

“We are very aware of situation with oil prices globally which will impact local prices. We have proposed an allocation of Sh25 billion to the fuel subsidy in our report to the Budget and Appropriations Committee,” Bonchari MP Pavel Oimeke, who is a member of the Energy committee, told Nation yesterday.

“The war in Ukraine will significantly increase fuel prices and if you let Kenyans shoulder that increase then it will burden them heavily,” said the MP.

This means the ongoing war is now set to throw a spin on the supplementary budget which is expected to be passed by MPs next month, with urgent shift in spending priorities in the mini budget.

The cost of crucial globally traded commodities such as Brent crude oil has already shot up to $100 per barrel just hours into the invasion, the highest level since 2014 , setting the stage for significant inflation that will be felt keenly by Kenyans.

Highest fuel prices

Russia is the world’s third largest crude oil producer, only behind the US and Saudi Arabia, while Ukraine is also a significant producer of the key product.

But MPs are set to hand a significant boost to Kenyans after they proposed a Sh25 billion allocation to the Petroleum Development Levy Fund (PDLF) through the supplementary budget for the financial year 2021/22 to ensure the government continues to subsidise the product. 

The Energy and Petroleum regulatory Authority (Epra) kept fuel prices unchanged for the fourth time in a row this month, with the last price change recorded in September when fuel prices hit a historic high amid a public outcry.

Epra said petrol prices would have increased by Sh14.53 per litre had the subsidy not been applied, a record high, which would have seen it retail at Sh144.25 per litre at the pump.

Meanwhile, diesel and kerosene would have also hit historic highs of Sh133.89 and Sh119.42 for the same quantity after increasing by Sh23.29 and Sh15.88 respectively. 

The increase in crude prices means unless the government subsidises the fuel prices once again in the monthly review set for March 14, Kenyans will be slapped with the highest fuel prices on record.

Last week, Petroleum Principal Secretary Andrew Kamau told MPs the fund had only Sh1.27 billion less, which is significantly lower than the nearly Sh8 billion needed monthly to compensate oil marketers.

Cost of living

National Treasury Cabinet Secretary Ukur Yatani in the estimates submitted to Parliament last month seeks to increase national government ministerial expenditure by Sh126.28 billion from the June budget, with key priority programmes earmarked for additional injection of funds.

“The supplementary estimates have been prepared to take care of post Covid-19 related interventions, drought-related expenditure, payment of pending bills, salary adjustments, 2022 General Election preparedness, CBC infrastructure, changes in development partners funded projects and rationalisation of budget,” Mr Yatani outlined the government’s strategy for the budget.

But this well laid spending plan is set to suffer shocks in a tough balancing act for the government to not only support the aforementioned programmes but also cater for the urgent emerging spending needs that have been fanned by conflict in Ukraine.

This is because the conflict will hit Kenyan households hard, with an expected escalation of an already hurting cost of living, with Kenya importing products such as wheat, maize, vegetables and sunflower seeds.

The National Assembly’s Budget and Appropriations Committee, which is chaired by Kieni MP Kanini Kega, is thus faced with tough choices to make as it compiles its report on the supplementary budget on programmes that should receive additional funds and those whose allocation should be slashed.

In the long term, however, economists reckon Kenya can prepare for such crises by measures such as boosting its fuel storage capacity and fostering growth of key agricultural products.

“In the short term, the government should aim to cut taxes such as value added tax on imports to reduce the burden on consumers. However, longer term measures need to be undertaken to boost preparedness against such externalities in future,”said  Mr Ken Gichinga, the chief economist at Mentoria Economics.