The implementation of a fuel subsidy scheme in 2020 was rushed and not sufficiently thought through. It was also not correctly supported by any existing law, regulation or institutional framework.
Ideally, a self-funding price stabilisation fund should have been created to be funded by consumers when global prices were low, and to refund consumers when prices were high. Use of the word “subsidy” was a misnomer as the fund was meant to be funded by consumers, not by the Treasury.
It appears that the Treasury diverted accumulated cash to other uses, making it difficult to refund consumers when prices escalated.
Political will to suspend the scheme was not there, leaving the oil marketers — by default — to bear the burden of funding subsidies, resulting in strained cashflows and reduced capacity to fund imports. It is timely that President William Ruto last week took a decisive step to stop the subsidies.
For, indeed, these were unsustainable and bound to further deplete the exchequer. Petrol is now without subsidies with diesel and kerosene being the next to go, probably next month. It is also understood that the new government has discussed with the oil industry how to reimburse the balance of monies owed.
By removing subsidies, the government has solved one problem and created another, that of high energy costs to the economy. Energy is a critical input for production and transportation in nearly all economic sectors , with high energy costs having a multiplier effect on inflation.
Opportunity exists to reduce petroleum taxes and levies starting with petroleum development levy (Sh5.40 per litre) which was justified on funding petroleum subsidies. The other is axing or postponing the annual inflation adjustment on petroleum excise duties.
Any downward revision of taxes will of course impact the Treasury's capacity to fund budget obligations, and this is why any review of petroleum taxes should be part of a wider exercise to revisit the 2022/23 budgets to cut out those areas which can be reduced or postponed. This will also permit funding of critical manifesto priorities.
Global oil prices are not expected to go down any time soon. This is why Kenyans will need to practise efficient use of petroleum by reducing luxury and discretionary driving.
On its part, the government should expedite implementation of rapid public transport in cities to reduce use of personal cars. Whatever efficiency and conservation measures taken to reduce use of expensive imported oil are equally positive for climate change mitigation and balance of payment stability.