President Ruto’s fuel cushion U-turn unsettles investors

Fuel station

Vehicles line up to fuel at a petrol station in Nairobi on July 1, 2023. 

Photo credit: Francis Nderitu | Nation Media Group

A decision by Kenya to reinstate a small cushion to stabilise retail fuel prices has triggered jitters among global investors on the State’s commitment to austerity and its ability to secure refinancing deals to clear huge external repayments.

The Energy and Petroleum Regulatory Authority (Epra) has cushioned consumers of super petrol, diesel, and kerosene to the tune of Sh7.33, Sh3.59, and Sh5.74 per litre, respectively, in the current monthly pricing cycle, in a reversal of government policy following public anger over the high cost of living.

The intervention was largely seen as a U-turn in President William Ruto’s policy shift from consumption subsidies. That prompted Epra, the industry regulator, to clarify that it was a compensation fully paid from the Petroleum Development Fund, unlike the previous administration’s subsidy, which was supported by the Treasury.

The fund, which is meant to shield consumers against the high costs of fuel, gets cash from the petroleum development levy, which was increased to Sh5.40 a litre of super petrol and diesel in 2020, while the charge for kerosene was retained at Sh0.40

The cushion to keep pump prices steady, however, appears to have unsettled global investors who now fear that it may hurt fiscal consolidation plans if sustained. The intervention came in the wake of the doubling of the value-added tax on fuel to 16 percent and opposition-fueled unrest over the rising cost of living.

“Kenya is increasingly looking for funding on the back of rising domestic borrowing costs as concerns about the country’s ability to meet its debt obligations have failed to dissipate. Higher borrowing costs have placed extra pressure on Kenya’s efforts to rein in its large budget shortfall,” David Omojomolo, Africa economist for UK-based Capital Economics wrote in a note on Kenya last week.

“Kenya has found success in obtaining funding from the World Bank and IMF. But as we warned, stabilising public finances has proved more difficult as seen in the partial U-turn on the removal of fuel subsidies.”

Domestic investors are now demanding returns of more than 14 percent to lend cash to the government for three months, the highest yields since late 2015.

The yields on Kenya’s 10-year Eurobond maturing June 2024 last week increased 1.03 percentage points to nearly 13.98 percent compared with the prior week, signalling the rising risk foreign investors are placing on Kenya’s debt.

Kenya is staring at record-high external repayment expenses in the current year ending June 2024, underlined by an estimated Sh112.39 billion to China and bullet Sh301.51 billion [as per budget books] redemption of debut Eurobond.

“Investor attention is focused on Kenya’s ability to meet its mid-2024 $2bn Eurobond repayment. Kenya’s fragile balance of payments position is not making it any easier to meet this payment, not helped by a slow tourism recovery,” Mr Omojomolo wrote.

Kenya’s fiscal austerities are largely hinged on the increased taxation, including doubling of value added tax on fuel to 16 percent and a 1.5 percent housing levy on monthly pay for workers. This was corroborated by Central Bank of Kenya Governor Kamau Thugge who has warned that Kenya has run out of room for spending cuts.

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