Gov't delays end of subsidy as fuel prices threaten to pass Ksh.200 mark

The government has held back against plans to phase out the fuel subsidy with petrol prices having threatened to breach the Ksh.200 mark without the support mechanism.

On June 15, the National Treasury - in a statement to newsrooms - indicated plans to roll-back the subsidy which it deemed untenable.

This is after the subsidy had eaten up the bulk of its Ksh.100 billion budget allocation in the 2021/22 and 2022/23 fiscal cycles.

“The cost of fuel subsidy could eventually surpass its allocation in the national budget, thus potentially escalating public debt to unsustainable levels and disrupting government’s plans to reduce the rate of debt accumulation,” the National Treasury said.

“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.”

On Thursday, State House indicated that the fuel subsidy had already eaten up Ksh.101.9 billion since its first utilisation in April last year.

Nevertheless, with petrol prices threatening to breach the Ksh.200 mark, the government has paused the planned wind up of the subsidy to shelter Kenyans from higher fuel prices.

Moreover, in allocating a further Ksh.16.7 billion to the subsidy program, the government has raised the difference compensated from the subsidy to Ksh.50.66 for super petrol, Ksh.53.70 for diesel and Ksh.53.22 for kerosene.

This from a previous cover of Ksh.25.56, Ksh.48.19 and Ksh.42.43 respectively in the preceding pricing cycle.

The retained subsidy has spared motorists from paying Ksh.209.78 for petrol and Ksh.193.70 for diesel.

Kerosene prices would meanwhile stand at Ksh.181.16 without the deployment of the subsidy.

The higher prices are mirrored by a 19 per cent jump in cost of imported super petrol in June and a 2.2 per cent jump in imported diesel costs.

At the same time, the Kenyan shilling depreciated by 1.41 per cent to exchange at a mean exchange rate of Ksh.118.53 against the US dollar in June.

Fiscal pressures emanating from the stay of the fuel subsidy are nevertheless set to ease should the recent trend represented by declining global oil prices stick into coming months.

For instance, the price of Murban Crude has fallen from $122.22 per barrel (Ksh.14,453) on June 14 to $100.65 (Ksh.11,902) on Thursday.

The falling global oil prices have been attributed to growing recession fears in advanced economies including the United States and the European Union (EU).

Should the falling global oil prices stick, this development could offer the government the opportunity to pull the fuel subsidy without resulting in higher domestic prices.

A further decline in global prices towards COVID-19 pandemic levels could meanwhile see the government kill two birds with one stone as lower crude prices cut both domestic prices and eliminate the need for the fuel subsidy.