In a surprising move, Kenya has decided to reinstate fuel subsidies in order to stabilise prices and protect consumers from skyrocketing pump prices.
This decision comes after the arrival of a cheaper consignment last week that had spooked oil marketers. The Energy and Petroleum Regulatory Authority made the announcement on Monday, stating that the subsidies would be in effect for the August-September pricing cycle.
The decision to reintroduce fuel subsidies was made in order to cushion consumers from the spike in pump prices caused by increased landed costs. Without government intervention, petrol prices would have risen to Sh202.01 per litre, diesel to Sh183.26 per litre, and kerosene to Sh175.22 per litre in Nairobi. However, with the subsidies, the prices will remain unchanged at Sh194.68 for petrol, Sh179.67 for diesel, and Sh169.48 for kerosene.
Under the new system, the oil marketing companies will be compensated from the Petroleum Development Fund. This move ensures that the burden of increased fuel costs is not solely placed on the consumers. The government will subsidise petrol by Sh7.33, diesel by Sh3.59, and kerosene by Sh5.74 from Tuesday onwards.
The decision to reinstate fuel subsidies follows correspondence between Epra Director-General Daniel Kiptoo and the chief executive officers of oil marketing companies on August 9. In the letter, Kiptoo addressed concerns that dealers would suffer cost differences without clear mechanics of recovery if the government intervened to bring down fuel prices. The reinstatement of subsidies reflects the government’s commitment to addressing these concerns and ensuring a fair balance between the interests of consumers and oil marketers.
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.
In a letter addressed to the CEOs of oil industry players, the Director-General of Epra acknowledged the concerns raised by the players. The letter stated 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.
The concern raised by the oil industry players is that in the event of the state intervening to cushion consumers from the high prices experienced in the international markets, the cargo introduced prior to the intervention will suffer cost differences without a clear mechanism of recovery.
To address these concerns, Mr Kiptoo confirmed that the government would introduce a new stock of fuel into the market as part of the intervention to cushion consumers. However, he also assured the marketing companies that Epra would verify and recover the volumes, ensuring that the difference in prices does not disadvantage them.
Despite this assurance, there are still some unanswered questions. It is not clear what volumes the state intends to introduce into the market, how they are being sourced, and when they are expected to hit the market. When approached for further details, Mr Kiptoo declined to comment on the matter.
According to a CEO of one large oil marketer, the government had already introduced lower-priced cargo into the market during the week ending on August 12. This move has caused some unease among players in the industry.
The introduction of a new stock of fuel into the market with lower prices can have significant implications for the industry. On one hand, it can potentially provide relief to consumers who have been grappling with high fuel prices. On the other hand, it can create disruptions and challenges for marketing companies that have already stocked up on fuel at higher prices.
There has been a significant influx of cargo in the market this week, causing a major disruption in the distribution and supply network of oil marketing companies in Kenya. Many OMCs have halted their sales to resellers due to the substantial price difference between the current cargoes and the wholesale caps provided by the Epra last month.
The CEO of a prominent OMC expressed concern over the high cost of these cargoes, suggesting that the recent letter from Epra aims to address these fears and potentially other issues. The CEO further highlighted that this situation could have serious consequences for the industry, as it may lead to a shortage of fuel in the market and disrupt the fuel supply chain.
This development comes just three months after Kenya discontinued its fuel subsidy program as part of its agreement with the International Monetary Fund. On May 14th, the Kenyan government removed the fuel subsidy, resulting in price hikes for super petrol, diesel, and kerosene. The price of a litre of super petrol increased by Sh3.40, while diesel and kerosene prices rose by Sh6.40 and Sh15.19, respectively.
To compound the situation, the state subsequently doubled the value-added tax rate from 8.0 percent to 16.0 percent, further driving up the cost of fuel for consumers. These actions were implemented to align with the ongoing financing package with the International Monetary Fund.
In response to the concerns raised by OMCs, Epra has reassured the industry that the government will be prepared to reimburse them for the price difference between the cheaper stock introduced into the market and the retail prices they will be selling at. This assurance aims to alleviate the financial burden on OMCs and maintain stability within the industry.
Furthermore, the Kenyan government has taken additional steps to address the subsidy arrears owed to oil marketing firms. The Treasury has securitized these arrears by issuing a three-year bond in the fixed-income market. This move demonstrates the government’s commitment to resolving outstanding financial obligations and supporting the sustainability of the oil marketing sector.