The government has forecast a further rise in fuel prices attributed to the Russia-Ukrain war which has seen global prices soar.
In a statement on Wednesday, June 15, 2022, Treasury Cabinet Secretary Ukur Yatani said that due to the rising fuel prices, the government could be unable to sustain the fuel subsidy programme.
Yatani spoke a day after the Energy and Petroleum Regulatory Authority (EPRA) announced an increase in fuel prices by Ksh9 in the June 2022 review.
"From the onset of the Russia-Ukraine War, there has been elevated volatility and uncertainty in the international oil markets given that Russia is the third-largest oil exporter in the world, commanding 11 percent of the global market share. This has resulted in significant increases in fuel prices in recent months to levels not seen since 2008, with an increase of more than 50 percent between December 2021 and May 2022, thus gravely impacting the cost of living," Yatani said.
Subsidy on fuel prices
Announcing the increase in prices, EPRA said that the government would use Petroleum Development Levy (PDL) to cushion consumers from the otherwise high prices. The calculated fuel prices for June-July period would have been Ksh184.68 for super petrol, Ksh188.19 for diesel and Ksh170.37 for kerosene. However, through PDL, the government will pay Ksh25.56 for super petrol, Ksh48.19 for diesel and Ksh42.43 for kerosene.
However, Yatani now says that the fuel subsidy programme might prove to be unsustainable for the government, which would force it to drop the programme in 2022 leading to exponential hike in fuel prices.
"Fuel subsidies are inefficient and often lead to misallocation of resources and crowding out of public spending on productive sectors, resulting in unintended consequences such as disproportionately benefiting the well-off. Additionally, scenario analysis suggests that fuel prices could increase further, but even if they do not, they are not expected to revert to levels experienced prior to the Russia-Ukraine War," Yatani added.
The government has allocated over Ksh100 billion in the financial year 2021/22 and 2022/23 to subsidize fuel prices.
"The cost of the fuel subsidy could eventually surpass its allocation in the National Budget, thus potentially escalating public debt to unsustainable levels and disrupting the Government’s plans to reduce the rate of debt accumulation. For this reason, a gradual adjustment in domestic fuel prices will be necessary in order to progressively eliminate the need for the fuel subsidy, possibly within the next financial year," he added.
Doing away with the subsidy, Yatani said, will create the fiscal space necessary for the government to
support targeted public spending on productive sectors that support the most vulnerable, such as fertiliser subsidies, universal health coverage, and subsidized primary and secondary education, among others.
