The proposal by oil marketers to convert the fuel subsidy arrears owed by the government into an interest-earning debt instrument like bonds is worth considering. It presents a pragmatic solution to the financial strain the State and the firms face.
The firms want their arrears estimated at Sh45 billion converted into a three-year debt instrument, offering them an opportunity to regular interest over the period.
Compensation delays have pushed suppliers into financial distress, forcing even the well-oiled multinationals into taking loans to fund operations amid fears of bank defaults. The fate of small dealers is worse.
With a bond, the revenue stream from the interest earned will ease the cash-flow woes and give the oil marketers a degree of financial certainty, renewing investor confidence in the sector.
For the State, such an arrangement will spare it from raising billions for the payments upfront. The Treasury has been struggling to make the debt, prompting disquiet in the industry.
The delays and pressure from the International Monetary Fund (IMF) forced the State to abandon the subsidy last month, triggering a jump in pump prices.
The government has spent Sh124.1 billion on fuel subsidies since April 2021, which helped stabilise prices. However, the IMF warned that the subsidies would set back taxpayers Sh119 billion if used throughout the financial year ending June.
Consequently, it would be a gain for the government to consider the debt-conversion proposal to allow it better manage its financial obligations by spreading out the payments to the dealers over an extended period, reducing the strain on the budget.