The Treasury will save an estimated Sh9.49 billion from the partial withdrawal of fuel subsidies that sent diesel and petrol prices to a historic high.
The energy regulator scrapped the subsidy on petrol a day after the new President, William Ruto, said subsidies were unsustainable, in a move that could add to upward pressure on inflation.
It for the first time in a year fully withdrew a Sh20.5 a litre subsidy on petrol and halved the reliefs on kerosene and diesel to Sh26.25 and Sh20.82 respectively.
This has reduced the burden of the subsidy from Sh14.5 billion to Sh5 billion as the new administration works on withdrawing State-backed discounts on petroleum products.
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Dr Ruto said in a speech after being sworn in on Tuesday that subsidies had been costly and prone to abuse, including causing artificial shortages of the very products being subsidised.
Late on Wednesday, the Energy and Petroleum Regulatory Authority set new, higher fuel prices for petrol, diesel and kerosene, which is commonly used for cooking by many poor households.
Petrol rose 13 percent to Sh179.30 in Nairobi, diesel 18 percent to Sh165 and kerosene 16 percent to Sh147.94 from a month earlier.
“Although the subsidy for super petrol has been removed, a subsidy of Sh20.82 and Sh20.25 has been retained respectively for diesel and kerosene in order to cushion consumers from the otherwise high prices,” Epra Director-General Daniel Kiptoo said.
Consumption data from Epra shows Kenya spent an average of Sh11.86 billion monthly to keep fuel prices low for six months to June.
While Kenya collects Sh5.40 a litre from motorists for the subsidy fund, the sharp rally in crude oil prices has forced the government to dip into taxes to defuse public outrage over the high cost of living.
The World Bank says the monthly expenditure on the programme that started in April last year continues to hurt the budget and planning, signalling its intention to push for the scrapping of the subsidy.
The International Monetary Fund (IMF) has set a fresh loan condition requiring Kenya to drop the fuel subsidy programme by October, exposing motorists to the sharp rise in pump prices.
Policymakers also warned that the subsidy measures could empty the country’s coffers.
In June, the Treasury said Kenya could run out of funds to subsidise fuel costs if prices kept rising, pushing public debt to unsustainable levels.
President Ruto said the Treasury had so far spent Sh144 billion subsidising fuel, which has helped stabilise prices at the pump but failed to keep inflation within the government’s preferred band.
Analysts said it was likely the new hikes would push inflation even higher, from a five-year high of 8.5 percent in August.
Like in other parts of the world, Kenyan inflation has accelerated, mainly due to the knock-on effects of a jump in crude oil prices. It stood at around 5.0 percent at the start of 2022.
The costs of energy and transport have a significant weighting in the basket of goods and services, which measures inflation in the country.
Producers of services such as electricity and manufactured goods are also expected to factor in the higher cost of petroleum.
The economy also uses diesel for transportation, power generation and running of agricultural machinery such as tractors, with a direct impact on the cost of farm produce.
Global risk assessment firm Verisk Maplecroft early this month said that Kenya is one of the countries alongside Peru, Iran and Sri Lanka facing the threat of civil unrest over the high cost of living, highlighting the task ahead for Dr Ruto.
The new President will have to tackle a surge in food and fuel prices triggered by the war in Ukraine, rising unemployment, and a mountain of debt used to finance development through former President Uhuru Kenyatta’s 10 years in office.
Policy analysts see little fiscal room for Dr Ruto to deliver quick relief.
The decision to scrap the subsidies will ease the marketers’ cash flow problems following delays in getting compensation leading to arrears of nearly Sh50 billion.