Did Kenya’s high debt push National Treasury to suspend fuel subsidy?

Saturday September 18 2021

Kenyan motorists are paying more for fuel after the Energy and Petroleum Regulatory Authority reviewed pump prices upwards. PHOTO | FILE


Kenyans have been pushed to the wall after the state abruptly suspended a fuel subsidy designed to cushion households and motorists from higher fuel prices triggered by a surge in international crude oil price that is currently hovering at around $75 per barrel from $63.35 per barrel in June.

The latest policy shift has seen fuel prices jump to an all-time high, fuelling inflation and sparking off public uproar over the increased cost of living already worsened by the Covid-19 pandemic.

Last week, the National Treasury removed a subsidy of Ksh7.10 ($0.06) per litre of super petrol, Ksh9.89 ($0.09) per litre of diesel and Ksh11.36 ($0.1) per litre of kerosene, pushing the cost per litre of petrol to Ksh134.72 ($1.23), diesel (Ksh115.6, $1.06) and Kerosene (Ksh110.2, $1.01).

While the government has remained mum on the reasons behind the move, The EastAfrican has learnt that the continuing precarious financial position of the government took another hit in July-August when the Treasury was forced to borrow locally through Treasury bonds to repay a Ksh15.03 billion ($137.88 million) foreign debt that had already fallen due of which 98 percent is the highly expensive syndicated loans.

Loan repayments

In the same period, the government’s tight financial position worsened after National Treasury Cabinet Secretary Ukur Yatani spent 64.1 percent of tax collected of Ksh253.46 billion ($2.32 billion) to repay a loan of Ksh162.37 billion ($1.48 billion), compared with 58 percent in financial year 2020/21.


“This shows that 64.1 percent of tax revenue collected is spent towards public debt leaving less funds towards other budget votes,” according to a report by the Controller of Budget (COB) on the status of public debt in Kenya presented to the Senate Standing Committee on Finance and Budget last month.

The report dated August 30, 2021, also reveals that as at June 30, the government paid Ksh1.65 billion ($15.13 million) as commitment fees on loans that have not been utilised despite loan agreements having been signed.

“COB recommends renegotiating debt repayment agreements and slowing down of borrowing so as to ensure tax collected is geared towards financing other components of the budget which include recurrent, development, pension and county government financing,” according to the report.

Kenya’s stock of public debt stood at Ksh7.71 trillion ($70.73 billion) as at June 30, 2021, comprising 52.1 percent and 47.9 percent external and domestic debt respectively.

National Treasury Principal Secretary Julius Muia and his counterpart at the state department of Petroleum and Mining Andrew Kamau declined to comment on the suspension of the fuel subsidy programme.

“Details of the Stabilisation Fund are best handled by my colleague, Andrew Kamau, Principal Secretary, Mining and Petroleum,” said Mr Muia.

Mr Kamau said: “Please refer the question to National Treasury.”

The state has since March offered consumers of diesel and kerosene a price reprieve, with those using petrol enjoying the benefit with the exception of the May review. The subsidy was a result of a reduction in oil marketers’ margin, which has been regulated by the State since 2010, with the dealers receiving compensation from the state.

The subsidy was supported by taxes collected from fuel consumers through the Petroleum Development Levy, which was increased to Ksh5.4 ($0.04) a litre in July last year from Ksh0.4 ($0.003).

The government is, however, tapping into the Fuel Stabilisation Fund without regulations to govern its operations.

“The government chose not to increase fuel prices over three months so they absorbed the cost of petroleum at that time and people were having a false comfort that prices were actually low,” said Patrick Obath, energy consultant and Managing Consultant at Eduardo & Associates.

Global crude prices

“The government was subsidising the increment globally but I suspect that the kitty they had was not sufficient to continue the subsidy. So the price has gone up to where it should be based on the Energy and Petroleum Regulatory formula for pricing. So the three months increment is not done in one month.”

The inflate rate for August 2021 increased to 6.57 percent from 6.55 percent in July caused by a sharp increase in the prices of food and cooking gas fuel, according to Kenya National Bureau of Statistics.

According to the National Bank of Rwanda global commodity prices increased during the six months to June 30, 2021, largely due to a rebound in global demand.

In the first half of this year crude oil prices increased by 59.2 percent on average compared to a decline of 36.8 percent in the same period last year following a rebound in global demand.

The IMF forecast crude oil prices to increase by 56.6 percent to $64.68 per barrel this year from $41.3 per barrel last year. According to the NBR, the global energy prices are projected to increase by 36.2 percent in 2021 and by 6.1 percent in 2022.