President Ruto makes U-turn, reinstates fuel subsidy he opposed

3 minutes

The government has reintroduced subsidies on petroleum products in what it said was aimed at cushioning consumers from higher pump prices. This prevented a litre of super petrol from hitting Sh200 in Nairobi although it continues to sell at well over this psychological price in many far flung towns across the country.

The reintroduction of the subsidy comes despite the spirited opposition that President William Ruto has had against what he termed as subsiding consumption. The president scrapped the subsidy on super petrol shortly after being sworn in to office in September last year. 

He did away with the subsidies on diesel and kerosene in May this year. Scrapping the subsidies on petroleum products was a move supported by the International Monetary Fund (IMF) that has been pushing the government to look for mechanisms to grow tax collections.

In the price capping guide for the August-September cycle issued Monday, the Energy and Petroleum Regulatory Authority (EPRA) retained retail prices for super petrol, diesel and kerosene at the same levels.

It added that the prices remained unchanged over the next month to September 14.

This will see super petrol continue retailing at Sh194.68 per litre in Nairobi, which is in comparison to the Sh202.01 that it would have hit without the state’s intervention, with the government footing the Sh7.33 difference for every litre.

Diesel will continue retailing at Sh179.67 per litre in the capital after the government applied a subsidy of Sh3.59 per litre. Kerosene will retail at Sh169.48 per litre benefiting from a subsidy of Sh5.74 per litre.

“In order to cushion consumers from the spike in pump prices as a consequence of increased landed costs, the government has opted to stabilise pump prices from the August-September 2023 pricing cycle. Oil marketing companies will be compensated from the Petroleum Development Fund (PDF),” said EPRA in a statement.

In addition to being very costly, Mr Ruto said subsidy interventions are inefficient and prone to abuse, adding that the fuel subsidy that the predecessor administration had put in place had not borne any fruit.

“They distort markets and create uncertainty including artificial shortage of the very products they seek to subsidise,” he said. The President instead had his sights on subsidising agricultural production through measures such as availing cheap fertiliser to farmers.

In the subsidy scheme that President Ruto is now forced to reinstate, the oil marketers forgo their margins at the pump to keep the prices low. They are later compensated by the government which draws funds from the PDF.

The kitty is funded by motorists who pay Sh5.40 as Petroleum Development Levy (PDL) per litre of super petrol and diesel every time they fuel. Kerosene is also charged PDL but at a lower rate of 40 cents per litre. 

The levy for the other products went up in 2020 from 40 cents. In the regulations that increased the levy on petrol diesel, the mandate for PDL was also expanded to include price stabilisation.  There, however, lacks supporting framework that should guide the government in using the money collected through the levy including the level of product prices that should trigger drawing from the Fund.

EPRA noted that there has been a marked increase in the landed cost of petroleum products, which is the price of fuel on reaching Mombasa before levies, taxes and oil marketer’s margins are loaded to give the retail price.

“The average landed cost of imported super petrol increased 6.84 per cent… diesel increased 4.29 per cent… while kerosene increased by 7.41 per cent,” said the regulator.

Data that EPRA used in determining retail prices shows that despite a drop in cost of crude oil, which dropped to $75.59 per barrel in July from $84.11 in June, a further slide in the shilling against the US dollar was among the reasons why Kenyans would have paid more at the pump.

The EPRA data shows that the shilling traded at an average of Sh146.07 against the dollar in July, weaker when compared to Sh144.48 in June.

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