Kenya: To stem fuel crisis, government set to pay back dues on subsidies

By Morris Kiruga
Posted on Tuesday, 5 April 2022 16:00

Boda Boda motorcycle taxi workers stand in line to fuel at a gas station in Nairobi
Boda Boda motorcycle taxi workers stand in line to fuel at a gas station in Nairobi, Kenya, April 4, 2022. REUTERS/Baz Ratner

The Kenyan government is set to pay back dues on subsidies to oil marketers this week, in a bid to end the ongoing fuel crisis in the country. 

The fuel shortage in Kenya, which began last week in the Western and North Rift regions, has now spread to the capital Nairobi, resulting in long queues of motorists and boda doda (motorcycle taxi) operators at stations that still have stock.

To curb hoarding and stretching of existing supplies, some stations have introduced limits on purchases, ranging between KSh1000 ($8.69) and KSh2000 in parts of Nairobi.

Oil companies triggered the shortage after they disrupted the sale of fuel and related products in protest of delayed subsidy payments. The government rolled out subsidies in April 2021 to reduce the pump price and get ahead of inflationary pressures as a result of rising global oil prices.

Subsidy model

During a radio interview over the weekend, the energy and petroleum principal secretary, Andrew Kamau, said the subsidy model and the rising price of oil globally have created cash flow problems for some oil companies.

He however accused private oil retailers of creating an artificial shortage, which – according to him – is what has triggered widespread panic buying. “If we all lived the way we normally live, I don’t think there’d be an issue,” he said.

The dispute has led to unconfirmed reports that some oil firms have redirected fuel from Kenya to Uganda and Tanzania.

In the subsidy model, the government reimburses oil companies for fuel already sold, forcing them to either tap into their cash reserves or seek loans to meet costs and cover taxes before they get reimbursed from the subsidy payments.

Profit margins have suffered a hit due to fixed pump prices that have kept oil companies’ margins at zero; long delays in subsidy payments and fluctuating oil prices.

“The recent escalation of international prices of petroleum products is generating a very strong economic squeeze resulting in fuel supply constraints,” the local subsidiary of French multinational Rubis Energy said in a statement.

The dispute has led to unconfirmed reports that some oil firms have redirected fuel from Kenya to Uganda and Tanzania.

The two sides also dispute how much is owed. Oil companies claim they are owed more than KSh20bn, while the government says the figure is KSh13bn and that the delay is not unusual.

Price review

In addition to the subsidy dispute, oil companies also want the laws changed to allow for retail price reviews every two weeks instead of the current monthly reviews.

In its mid-March review, which set prices until 14 April, the country’s energy regulator increased the price of petrol and diesel by KSh5 to stand at KSh134.72 and KSh115.60 respectively. The price of kerosene, a vital household commodity in Kenya, however remained unchanged at KSh103.54.

To keep the pump prices at these levels, the government is paying subsidies ranging between KSh20.39 and KSh27.56 per litre. Kenya’s Central Bank Governor Patrick Njoroge said at a press conference last week that the fuel subsidy will remain for the foreseeable future, but “there will be adjustments that will put some burden on the consumers”.

On Monday, President Kenyatta signed a supplementary budget adding an additional KSh34.4bn to the fuel subsidy program, according to a statement from State House Nairobi.

Food security complications

Although it may be short-lived, the fuel shortage is bound to further complicate Kenya’s food security plans as it has disrupted the ongoing planting season.

The agricultural sector has been reeling from a spike in the price of inputs, particularly fertilisers. The supplementary budget signed by President Kenyatta includes a KSh5.7bn subsidy on fertiliser prices, which first spiked due to Covid-19 disruptions on supply chains and are now further disrupted due to export restrictions by the biggest producer countries, as well as the Russia-Ukraine conflict.

The subsidy allows farmers to pay less than half the going price for most fertilisers, but all farmers – both large and small scale-are limited to 20 bags each.

The much-needed subsidy programme is meant to support cultivation of 1.13 million acres as the government tries to ensure food security. Food inflation, characterised by high price of inputs and failed rains, increased to 9.9% in March from 8.7% in February, the Central Bank of Kenya said in its bulletin issued in the first week of April.

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