Fuel subsidy has been slashed by 84 percent or by Sh26.7 billion for the year starting next month, pointing to costly petrol and a political headache for the next government.
Budget documents tabled in Parliament show a Sh5 billion allocation for the subsidy in the fiscal year starting July against the Sh31.7 billion used this year to stabilise prices at the pump and keep inflation within the government’s preferred band.
The reduced allocation sets the stage for costlier fuel in an environment where global costs of crude are projected to close the year at $104 per barrel. It will put the new government after the August 9 elections under pressure amid the simmering public anger over the high cost of basic items that has pushed inflation to a 27-month high.
The Budget Committee of the National Assembly says the Sh5 billion will be depleted by September, fuelling fears of a spike in the cost of diesel, super and kerosene.
“It is projected that the crude oil prices are unlikely to reduce due to the ongoing Ukraine-Russia conflict, the department may end up exhausting the Sh5 billion provided for the fuel subsidization programme in the first quarter,” the Budget Committee said.
The government rolled out a fuel subsidy in April last year to cushion consumers from the surge in the price of oil in international markets.
Without the subsidy, a litre of petrol in Nairobi would be retailing at Sh176.47 compared to Sh150.12 today. Diesel would hit Sh174.94 from the current Sh131.
Brent crude, the global benchmark for oil prices, has risen more than 70 percent over the past year, and is forecast to remain elevated in the coming months. Prices of oil and gas have soared in recent months, fuelled by the lifting of lockdowns and the Ukraine war.
Rising energy costs are putting pressure on consumers, making it to use cooking gas, which is cleaner than other sources of energy.
The war in Ukraine has pushed countries in the West to shun Russian energy supplies in an effort to condemn the conflict and push for a return to normalcy.
Like other frontier economies, Kenya is reeling from the surge in crude oil prices, which has forced it to start subsiding retail prices. The subsidy scheme has been supported by billions of shillings raised from fuel consumers through the petroleum development levy, which was increased to Sh5.40 a litre in July 2020 from Sh0.40, a 1,250 percent rise.
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The levy cushions consumers from volatility in fuel prices but has also sees motorists lose out when paying the Sh5.40 for a litre at the pump.
But the sharp rally in crude oil prices in recent months has depleted the fund and made it unsustainable, prompting the State to raise the red flag over the use of taxes to curb a sharp rally in prices at the pump.
“Allow me to clarify on what you call Treasury cut; all these budget figures are developed through very consultative sector working groups, compiled and harmonised by Treasury and appropriated by the National Treasury,” Treasury Principal Secretary Julius Muia told the Business Daily on Monday.
Policymakers and politicians are taking notice of the online campaigns by ordinary Kenyans concerned about reduced cash flow, fewer employment opportunities, and the rising cost of living as campaigning for the August elections intensifies.
Opposition leader Raila Odinga and Deputy President William Ruto have both promised to lower the cost of living if elected Kenya’s fifth President.
Kenya’s inflation hit a 27-month high in May on the back of a jump in the price of essential items like cooking oil, food, fuel and soap, squeezing household budgets and demand for goods and services.
The cost of living measure rose to 7.1 percent in May from 6.5 percent the prior month.
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This is the highest jump in inflation since February 2020 when it stood at 7.2 percent, prompting the Central Bank of Kenya (CBK) to warn that the measure risked rising above the government’s target range of 2.5-7.5 percent.
This has forced many households, especially in the low-income segment, to reduce their shopping basket in an environment where firms have frozen salaries as they recover from Covid-19 economic hardships.
The high prices have forced households to reduce spending on non-essential items such as beer and airtime, ultimately hurting firms like East Africa Breweries Limited and Safaricom.