Ruto fuel

President William Ruto administration’s promise to stabilise the cost of fuel through a government-to-government deal has fallen apart.

| Nation Media Group

Why Ruto’s promise of cheap fuel after Gulf deal has failed

President William Ruto administration’s promise to stabilise the cost of fuel through a government-to-government deal has fallen apart on the back of domestic and international headwinds, handing consumers a bitter pill of record high pump prices barely two months after introduction of a raft of new taxes.

Kenyans were on Friday hit with the highest pump prices on record, driven by a combination of factors that have dimmed prospects for any potential gain consumers would have made from the much-hyped government-backed fuel importation deal.

Deputy President Rigathi Gachagua and President Ruto’s economic advisor David Ndii in March this year flew to the Mombasa port to receive the first consignment of oil imports under a government-to-government deal that saw Kenya ship in petroleum from Gulf states on credit to stabilise pump prices as well as a sharply depreciating shilling.

However, the Energy and Petroleum Regulatory Authority (Epra) announced a new price schedule in which a litre of diesel jumped by Sh21.32 to Sh200.99 in Nairobi while that of super rose by Sh13.96 to Sh211.64. Kerosene jumped by the highest margin of Sh33.13 a litre to Sh202.61. The situation was made worse by the increase in VAT on petroleum products in the Finance Act 2023 from eight per cent to 16 per cent.

The record high prices, which spell gloomy days ahead for consumers, was fuelled by a sustained rally in global prices of refined petroleum, a sharply weakened shilling that has made imports costlier and sustained pressure by the International Monetary Fund (IMF) to scrap subsidies.

The three factors marked the last blow to the government-backed fuel deal that the Ruto administration counted on to stem the depreciation of the shilling against major world currencies—particularly the dollar — and pass on the gains to consumers in the form of relief at the pump.

The Treasury, top State officials in the energy sector and even economic advisors at State House were bullish as the deal was closed in April, saying that it was a genius move whose impact on the economy in the coming months would be profound.

“Let me also, in a very special way just commend some of our performers: my economic advisor David Ndii, Mohammed Hassan, Davis Chirchir (energy Cabinet secretary) and the young man at Epra (Mr Daniel Kiptoo). Those four gentlemen have done something phenomenal in our country. They have managed to put together a programme that has taken us away from looking for $500 million every month to buy our fuel needs, which was slowly snowballing into a crisis. Today, we can buy fuel in Kenya shillings, something that many people never thought would be possible… In fact, in the next one month or so, you will see the exchange rate coming down in a very phenomenal way. In my estimation, in the next couple of months, the exchange rate will come below Sh120. Maybe Sh115, you never know.” President Ruto said on April 11 this year.

But on Friday, any hope of consumer relief due to the deal went up in smoke as pump prices shot through the roof, leaving the government in a tight spot amid promises to ease cost of living on hustlers.

Amid growing public outrage over the trickle-down effects of the sky-high pump prices, Energy and Petroleum CS Davies Chirchir gave mixed messages. On the one hand he said Kenyans were likely to enjoy a reprieve next month after the government successfully renegotiated the freight and premiums of super, diesel and jet fuel in the deal.

“Certainly, we will enjoy the benefits of the renegotiated freight and premium this coming month amid all the global factors we are experiencing,” Mr Chirchir said on Friday.

But on the other hand he told the National Assembly’s Departmental Committee on Energy on Friday that there was little the government could do to control the global factors and Kenyans should brace themselves for higher prices.

While the deal has eased monthly demand on the dollar — but without strengthening the shilling — the promise of pump price relief on consumers has been dented.

“The exchange rate is a critical variable in the determination of petroleum pump prices and any currency depreciation is directly transferred to the end consumer in the form of increased retail prices,” top energy officials told Parliament on Friday.

Under the deal signed in April, Saudi Aramco of Saudi Arabia, Emirates National Oil Company and the Abu Dhabi National Oil Company are supplying Kenya with fuel for 270 days, and on an extended credit period of 180 days.

Gulf Energy, Galana and Oryx Oil import four cargoes of diesel, three cargoes of super and one cargo of dual-purpose kerosene from the three Gulf oil majors under this deal.

The sky-high prices have now shifted focus on the deal that is set to lapse in December, with the government open to extending it into the New Year.

An expert in the petroleum industry who sought anonymity now says the government is running out of space and has to return to the Open Tender System (OTS) next year.

“The government’s best option now is to cancel the deal and return to OTS. The deal has been made worse by the new VAT rate. They (government) have no much choice at the moment,” said the industry expert.

The government maintains that the deal has achieved its main target; that of stemming the plunge of the shilling against the dollar. Prices of super, diesel and kerosene which are driven by the crude costs have surged over the past three months.

The Platts pricing (benchmarks in the global energy markets) shows that super shot to $947.97 per metric tonne last month from $818.01 in June while that for diesel shot to $853.40 per metric tonne from $636.71 a metric tonne in the same period.

Kerosene posted the sharpest jump to $903.25 per metric tonne from $692.39 a metric tonne, according to the international pricing benchmark provided by S&P Global Platts.

The shilling also plunged against the dollar to 148.98 units last month from 144.48 in June, making imports costlier and further denting hopes of cheaper fuel.

IMF—one of Kenya’s single biggest financing partner— also got its way after the Ruto administration bowed to pressure and rejected calls to stabilise pump prices to cushion Kenyans.

The Bretton woods institution in July last year pushed Kenya to drop the fuel stabilisation scheme saying that it had continually disrupted budgetary planning besides distorting market dynamics. The Ruto administration ultimately bowed to IMF’s pressure.

IMF, alongside the World Bank, have gained a bigger say in government policy after Kenya turned to them for concessional loans in the wake of the coronavirus pandemic that ravaged revenues and limited Kenya’s access to commercial loans.

For a government that rode to power on the promise of lowering the cost of living on ‘hustlers’ the sky-high pump prices will magnify the headache of trying to fulfil this pledge.

Inflation, a measure of the cost of living, had last month dropped to 6.7 per cent, falling into the government’s preferred band of between 2.5 and 7.5 per cent.

The drop has been attributed to a fall in food prices as the supply of maize and vegetables improved due to better weather, gains that will now be washed away by the high pump prices.

Dr Ruto has since taking over at State House in September last year come under pressure to bring down the cost of living as he had promised during the campaigns.

The Kenyan economy is diesel-driven with transporters, farmers, manufactures and service providers expected to factor in the high energy costs when pricing products and services, setting up consumers for tough days ahead.

On Friday, public transport service providers announced that they will hike fares by a range of between Sh30 and Sh50, setting off the first ripple effect of the high cost of fuel.

Recent statements by Trade CS Moses Kuria that Kenyans should brace for tougher times at the pump will add to the headache of a government torn between giving hope and telling the painful truth.

“Global Crude Prices are on an upward trajectory. For planning purposes expect pump prices to go up by Sh10 every month till February,” Mr Kuria said hours after Epra announced the new prices.

Yesterday, Mr Kuria dismisssed those complaining about the high prices to “dig their own (oil) wells.”