The government on Monday reinstated fuel subsidies in a major U-turn as it moved to cushion consumers from skyrocketing pump prices following the arrival of a cheaper consignment last week that had spooked oil marketers.
The Energy regulator kept the prices of fuel unchanged in the latest review cycle after reintroducing the subsidies that would have seen pump prices cross the Ksh200 ($1.39) mark.
“In order to cushion consumers from the spike in pump prices as a consequence of the increased landed costs, the government has opted to stabilise pump prices for the August-September pricing cycle,” the Energy and Petroleum Regulatory Authority (Epra) said in a statement.
Epra said the oil marketing companies will be compensated from the Petroleum Development Fund. According to Epra, without its intervention, the prices of petrol would have risen to Ksh202.01 ($1.41) a litre, diesel to Ksh183.26 ($1.27) a litre and kerosene would have increased to Ksh175.22 ($1.22) a litre in Nairobi.
But instead, the prices will remain unchanged at Ksh194.68 - $1.35 (petrol), Ksh179.67 - $1.25 (diesel) and Ksh169.48 - $1.18 (kerosene).
This means that the government will subsidise petrol for Ksh7.33, diesel for Ksh3.59 and kerosene for Ksh5.74 from Tuesday.
This comes on the back of correspondence seen by the Business Daily that shows that the Epra Director-General Daniel Kiptoo, wrote to the chief executive officers of oil marketing companies on August 9 responding to concerns that should the State go ahead and intervene to bring down the fuel prices, dealers would suffer cost ‘differences without clear mechanics of recovery'.
Mr Kiptoo, who revealed the intention to intervene in a bid to ease the burden of the cost of fuel on Kenyans, sought to allay fears that the relatively low-priced stock would trigger a price distortion and leave them disadvantaged since they will be selling stock that has a higher price.
“The authority notes that volumes in excess of the quantities factored for the July to August pricing cycle may be introduced in the market prior to the next pricing cycle,” stated Epra director-general’s letter to the CEOs.
“Oil industry players are concerned that should the State intervene to cushion consumers from the high prices being experienced in the international markets in the coming pricing cycle, the cargo introduced prior will suffer cost differences without a clear mechanism of recovery.”
Mr Kiptoo confirmed that the government would introduce a new stock of fuel into the market as part of the intervention to cushion consumers but assured the marketing companies that Epra would verify and recover the volumes.
It is not clear what volumes the State looks to introduce into the market, how it is being sourced and when it is expected to hit the market.
Mr Kiptoo declined to comment on the matter when reached by the Business Daily.
A CEO of one large oil marketer, however, told the Business Daily that the government had already introduced lower-priced cargo into the market in the week ended August 12 and this had caused disquiet among players in the industry.
“There’s been an extremely high cargo introduced in the market this week and most OMCs (oil marketing companies) had stopped selling to the resellers citing the huge price difference. This was very likely to cause a major disruption in the distribution and supply network,” the CEO told the Business Daily in confidence.
“The cost of the current cargoes goes beyond what Epra provided as the wholesale caps last month and I can only think that this letter seeks to allay these fears may be among other things,” the CEO says.
This comes barely three months after Kenya dropped the subsidy programme in line with the conditions of the ongoing financing package with the International Monetary Fund.
The Kenya Kwanza government retired the fuel subsidy programme on May 14, increasing the price of a litre of super petrol by Ksh3.40 while that of diesel and kerosene increased by Ksh6.40 and Ksh15.19, respectively.
The price of fuel was further increased after the State doubled the value-added tax (VAT) to 16.0 percent, up from 8.0 percent.
Epra's assurance to oil marketing firms means that government will stand ready to reimburse industry players for the difference in pricing between the cheaper stock introduced and that which they will be retailing.
The move by the government comes at a time when the Treasury has securitised subsidy arrears owed to oil marketing firms through the issuance of a three-year bond in the fixed-income market.