World Bank warns of costly fuel subsidies

“Fuel subsidies in Kenya have contributed to stopping fuel prices from rising.This has been successful so far, but it will place pressure on public finance if the war continues,” the World Bank stated in its April updated report on the Sub-Saharan Africa (SAA) economic outlook last week.

The warning by the multilateral lender comes on the backdrop of delays in payments to oil marketers from the fuel subsidy which has been viewed as the trigger factor for one of Kenya's longest fuel shortages crisis in recent history.

The World Bank has nevertheless listed the fuel subsidies among more responsive policy decisions to respond to the high food and fuel costs exacerbated by the Russia-Ukraine war.

Other solutions highlighted include price regulations, investigations of supply shortages caused by unscrupulous speculators and the temporary reduction in the value-added tax on regular household goods including cooking oil and gas.

However, with limited fiscal space, the World Bank says subsidies as a policy response to contain prices might require further concessional lending.

“These measures can potentially have important fiscal costs if commodity prices remain elevated- and some of them might introduce allocative distortions if they are not withdrawn in a timely fashion,” the World Bank added.

Earlier this month, the National Treasury admitted to fiscal pressure emanating from the application of the fuel subsidy which requires billions of shillings every month to cushion Kenyans against otherwise higher fuel costs.

On Thursday however, Petroleum Principal Secretary Andrew Kamau defended the sustainability of the subsidy fund even as he remained wary of the external shocks to pricing.

“We were collecting the money (for the subsidy) way before we had to pay any kind of subsidy in April 2021. The subsidy is like an insurance plan. We don’t know what international prices could be but we are here to do it (cushion consumers),” he said.

According to disclosures by the National Assembly, the fuel subsidies had accrued Ksh.49.2 billion in arrears since April 2021 to April 4, 2022, out of which Ksh.34.6 billion had been paid to oil marketing companies (OMCs).

The Petroleum Ministry indicated the balance of Ksh.14.5 billion would be paid to the marketers latest on Tuesday this week.

In the current pricing cycle (April 15-May 14), the fuel subsidy has cautioned Kenyans from a further Ksh.29.08 rise in the price of petrol, Ksh.40.24 for diesel and Ksh.46.55 for kerosene.