We can all admit that on many occasions over the past year, we have been involved in a discussion about the state of our Energy sector; whether in a matatu, a taxi, or even at a local food and entertainment joint. The debates are becoming more heated on various social media platforms. More and more people are seeking answers to their concerns about rising fuel and commodity prices.
Citizens must have access to credible information during such periods in order to obtain a clear grasp of the reasons for high fuel costs and the sector's general functioning. Of course, people have heard about the Ukraine crisis and its global effects on food and fuel prices, but without proper communication in a way that they can understand, much is left to speculation, especially during and after an election season when there are reports of corruption, cartels, and a variety of other malpractices in the energy sector, among other sectors.
Citizens who are better informed will be able to hold all parties accountable, including sector regulators and even their representatives. Unfortunately, such information is not always readily available, allowing them to hold politicians and regulators accountable when things go wrong
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The relationship between soaring fuel costs, fuel subsidies, and their effects on the local commodities market has been a source of severe controversy. Though much has been uncertain about the subsidy's management and consumption, its strategy and sustainability are now under severe examination.
In Kenya, pump price hikes have typically been attributed to the rise in crude prices. As economies recover from the pandemic, demand continues to increase and it seems like the only way is up. Burdening debt and soaring inflation further weaken consumer spending power and available income which in turn adversely affects national GDP. The global price markers were much higher in 2008, 2014- (before the crash) and 2018, than they are now in 2023.
However, fuel prices are presently at the highest level in recorded history, but in Kenya strangely, government levies make up close to 60% of the listed prices. The growing concern is whether the hikes are solely attributed to the rally in crude prices impacted by the after-shocks of the Ukraine-Russia conflict.
Presently, Government has established production subsidies; which help the extractive industry increase the profitability of extraction and transportation of fuel, usually by tax rebates or production credits.
Such fiscal incentives create an attractive environment for Foreign Direct Investment in the extractive sector. Consumer Subsidies are what we mwananchi' receive through Treasury. Energy products are made cheaper for end users, in the face of global price hikes. Countries like India, and Indonesia have implemented such subsidies, while the US and much of the EU are making arrangements to stop fossil fuel subsidies through policy reforms in line with the Paris Agreement on Climate Change via the Net-Zero Energy transition.
By June this year, Treasury had publicly voiced its concerns about the subsidy’s impact on the economy, consequently slashing its budget by 84% to about Sh. 5.08 billion. Even with that, budget data indicates that the country has spent over Sh. 71 billion in subsidizing petroleum products for Kenyans in the just first half of the year. Additionally, strict conditions from lending institutions; IMF and World Bank, continue to pile pressure on the government to drop the subsidy scheme by October 2022, which as observed till January’s review with Gasoline and Diesel prices shoot to Sh. 177.3 and Sh. 162.0 per litre respectively. This has not only triggered uproar amongst citizens but also exacerbated our inflation pain points, making the incoming government’s work more complex and delicate, especially with the expectations of the party’s manifesto.
This then raises the question of the scheme’s practicality; not forgetting the ones implemented in the agricultural sector to primarily safeguard food security, which have different sets of benefits and drawbacks.
Isn’t it time for Subsidy reform?
Let’s use 2 possible Scenarios to answer this Qn…
SCENARIO 1: this would be a 'business-as-usual' case; where existing subsidies are maintained and no change in policy occurs. Based on the debt data and COVID-19 recovery, countries require revenue influx and have to borrow from capital markets and institutional lenders under strict conditions.
Fuel taxation is also likely to increase as the government seeks to shore up its coffers given the risk-averse nature of an incoming government, only piling more pressure on citizens’ available income.
ANOTHER SCENARIO: would be the Treasury getting rid of the subsidy entirely and the expenditure withdrawn or reallocated to other sub-sectors. The immediate impact would be a fuel price hike and knock-on effects to other micro-sectors impacting transport costs, household bills, and consumer goods pricing. In the short-term, mid-to-low-income households and businesses are most likely to be affected by the price shocks; directly impacting their available revenue, savings, and capacity to grow.
The Government in response could formulate a redistribution mechanism that injects revenue from subsidy savings back into households and SMEs in the form of cash transfers and reduced taxation.
Each scenario has its benefits and drawbacks, but what remains certain is, our economy’s fragility and the impact of ineffective fuel taxation affecting the more vulnerable population groups and enterprises.
Feel Free to share any other Scenario you think would occur in 2023….
Looking ahead, Kenya's ability to continue mitigating the negative effects of the present economic shocks that have harmed our economy is constrained, whether in terms of fiscal space, ability to incur new debt, or the state of its forex reserves. Regarding the fuel subsidy issue, while it has been useful in trying to stabilize domestic fuel prices, utilising resources generated when international market prices fall without a proportionate downward adjustment of domestic fuel prices will remain a challenge.
Seems like the only way out and a huge in-tray item for the new administration is to push for a narrowing of the gap between global and domestic fuel prices within a reasonably tight timeline, to free up fiscal space for investment and address the misaligned benefits of fuel subsidies.
Ultimately, with the right social and institutional support, Kenya can make a rebound and make progress toward subsidy reform and budget utilization. In the meantime, it could be time to get back to the drawing board....
Thank you for sticking around thus far….
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