Why fuel prices will continue increasing

The government is mulling a plan to gradually adjust domestic fuel prices saying that the move is necessary in order to progressively eliminate the need for the fuel subsidy, possibly within the next Financial Year.

National Treasury and Planning Cabinet Secretary (CS) Ukur Yatani said that this will then create the fiscal space necessary for the government to support targeted public spending on productive sectors that support the most vulnerable, such as fertilizer subsidies, universal health coverage, and subsidized primary and secondary education, among others.

In a statement on Wednesday, Yatani said that the Sh9.0 per litre fuel increase published by the Energy and Petroleum Regulatory Agency (EPRA) on 14th June, 2022, will help contain the cost of the fuel subsidy.

“This notwithstanding, the published fuel prices of Shs.159.12, Sh140.00 and Shs.127.94 per litre of petrol, diesel and kerosene, respectively (in Nairobi), are still significantly lower than prevailing prices in other countries in the region, such as, Uganda, South Africa, Zambia and Rwanda,” explained the CS.

He said that without the fuel subsidy, fuel prices would have retailed at Shs.184.68, Shs.188.19 and Shs.170.37 per litre of petrol, diesel and kerosene, respectively.

“The National Treasury will continue to monitor these prices with a view to taking measures to cushion the most vulnerable to enable them adapt in the face of these global shocks,” said Yatani.

He explained that 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,” he said.

The CS highlighted that fuel accounts for 20 percent of Kenya’s import bill and the volatile international oil prices thus expose Kenya’s open economy to the risk of imported inflation.

“For this reason, the Government has been subsidizing fuel prices so as to ensure that the rising fuel prices do not push the prices of most basic commodities and services beyond the reach of most citizens,” he said.

He added that towards this end, the government has allocated over Shs.100 billion, in the Financial Year 2021/22 and 2022/23 to subsidize fuel prices.

“However, 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,” Yatani said.

He added that the 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.

“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,” said the CS.