President William Ruto indicated on Tuesday he will imminently drop the fuel subsidy, setting up Kenyans for higher transportation and production costs.
Dr Ruto said in his inauguration speech that the economy cannot sustain consumption subsidies in the coming months, pointing to a policy shift that may see him leave the prices of food and fuel to be determined by the market forces of supply and demand -- at least in the near term.
Dr Ruto, however, left the markets guessing his short-term strategy to deal with public concerns about the cost of living after acknowledging the cost of food and transportation was unaffordable to most households and needed an "urgent and decisive resolution".
The removal of fuel cost stabilisation programme could see pump prices shoot above Sh200 per litre for the first time. The cost of a two-kilogramme packet of staple maize flour meal has remained at Sh200 on average after a failed subsidy deal with millers in July.
"On fuel subsidy alone, the taxpayers have spent a total of Shh144 billion, a whopping Sh60 billion in the last four months. If the subsidy continues to the end of the financial year, it will cost the taxpayer Sh280 billion, equivalent to the entire national government development budget," Dr Ruto said at the inauguration attended by 18 heads of government in Africa.
"Additionally, there was an attempt to subsidise unga [maize flour] in the run-up to the election, a programme that gobbled up Sh7 billion in one month, with no impact."
Kenya has since April last year spent an average of Sh9 billion to subsidise diesel, super petrol and kerosene— costs which rose to an average of Sh12 billion in the last four months alone— highlighting the adverse impact of the intervention on the country’s revenue.
The Energy and Petroleum Regulatory Authority (Epra) will announce new monthly prices today for the period ending October 14. Without the subsidy, motorists would have paid historic highs of Sh214.03 per litre of super petrol and Sh206.17 for diesel for the current monthly pricing cycle.
That is 34.6 percent (Sh55) and 47.3 percent (Sh66) more than the current Sh159.12 for petrol and Sh140 for diesel, respectively.
Fuel inflation was the key driver of overall consumer prices in Kenya in the past year due to higher pump prices as oil rallied after muted demand in 2020 before being overtaken by food inflation earlier this year due to below-average rainfall since, which has hit agricultural output.
"In addition to being very costly, consumption subsidy interventions are prone to abuse, they distort markets and create uncertainty, including artificial shortages of the very products being subsidised," Dr Ruto said.
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While he made it clear that the new administration will ease high food inflation by subsidising the cost of farm inputs, he made no reference to the direction he will take in lowering the cost of fuel which is partly driven by global factors.
Prior to being elected in the closely-contested presidential poll on August 9, Dr Ruto had pledged to relook a raft of taxes, which account for nearly half of the price of petrol, as part of his plan to lower the cost of fuel.
"The cost of living challenges are related to production. Our strategy to bring down the cost of living is predicated on empowering producers," the President said. "Our priority intervention, therefore, is to make fertiliser, good-quality seeds and other agricultural inputs affordable and available."
Short-term interventions will include making available 1.4 million bags of fertiliser to farmers in agriculturally-productive areas of Eastern, Central and Western regions from next week at a price of Sh3,500 for a 50-kilogramme bag — a 46 percent drop from current average of Sh6,500.
The approach taken by the new administration to discontinue subsidies is in line with commitments made to the International Monetary Fund (IMF) by the administration of President Uhuru Kenyatta to end the subsidies by October.
"The authorities intend to continue gradually realigning domestic to global fuel prices in FY2022/23 so as to eliminate the fuel subsidy by October 2022," the IMF wrote in the third programme review in July.
"The authorities also plan to complete by end-July 2022 a review of application of Kenya’s fuel pricing mechanism and constitute a taskforce to oversee the progressive elimination of the fuel subsidy within the first half of FY2022/23 and to ensure that fuel pricing actions are at all times aligned to the approved budget (new structural benchmark)."