Pump prices in Kenya to remain high despite cool off in the global market

By Herald Aloo
Posted on Monday, 12 September 2022 10:15

An employee pumps fuel into a car at a Shell petrol station in Nairobi
An employee pumps fuel into a car at a Shell petrol station in Nairobi, Kenya, September 20, 2018. REUTERS/Baz Ratner

After suffering financial blows for almost three years amid massive infrastructure projects, Kenya Pipeline Company (KPC) is seeking to increase tariffs on storage and transportation of petroleum products, effective 14 October, to bolster its coffers.

Upon regulatory approval by the Energy and Petroleum Regulatory Authority (EPRA), the storage and handling charges will surge to KSh874.44 per metre cubic of oil, up from the prevailing Ksh696.83 rate. The pipeline transportation tariff will rise to KSh3.87 per metre cubic per kilometre.

Just as is the case with other costs of delivering consumer goods and services, the storage and pipeline charges are often transferred to motorists and households through hiked pump prices.

This is set to collide with plans to adjust the excise duty inflationary rate, the scrapping of fuel subsidy, and the weakening of the local currency, maintaining the hiked pump prices in Kenya even as global crude oil prices cool off.

The excise duty rate inflationary adjustment by the Kenya Revenue Authority (KRA) on certain consumer goods, including fuel, is aimed at cushioning the state’s revenue from being eroded by imported inflation.

“The commissioner-general adjusts for inflation the specific rates of duty set out in the schedule hereto in accordance with the formula specified in Part 1 of the First Schedule to the Act with effect from the 1st October 2022 and takes into account the average inflation rate for the 2021/2022 financial year of six decimal three per centum (6.3%),” KRA said in the latest draft policy statement undergoing stakeholder engagement.

The excise duty rate, effective 1 October, will be increased by 6.3%, representing the average inflation rate recorded across 12 months to June. The adjustments are in line with the 2015 finance law that gives the tax agency powers to revise duty upwards in line with official inflation records.

‘Kenyans will hurt’

“Prices of fuel will definitely go up and Kenyans will hurt. The government could have done all the reviews in a smart way that Kenyans cannot realise. If it was a must to introduce the charges, they should have been introduced in phases until the economy recovers fully,” says Linus Gitonga, an energy expert and ex-commissioner of the Energy and Regulatory Commission (ERC), now EPRA.

Taxes continue to account for the biggest percentage of pump prices in the country, as consumers pay about nine different taxes and levies, with excise duty being the highest. For every litre of fuel, about 45% of the price goes to taxes.

The inclusion of fuel products in the tax-inflation adjustments comes despite an active court case lodged last year that barred KRA from effecting changes that would have increased the excise rate of petrol and diesel by 4.97% from October 2021. KRA has since moved to court to challenge the ruling.

Spacing the implementation of tax adjustment, petroleum storage tariff reviews, and elimination of the fuel kitty at a difference of six months or a year would offer reprieve to the citizens

Manufactures have been pushing for the inflation adjustment to be effected once every two years, citing the need for tax predictability and room to develop post-Covid-19 recovery plans.

The National Treasury had, in the Finance Act 2022, instead empowered KRA to exempt specified products from the tax reviews depending on the prevailing economic condition to cushion households from inflationary effects, one of the causes of an increase in taxes for basic commodities.

This directive comes into force in January 2023 and it is expected that critical products, such as petroleum, will be spared from adjustments. Just like any other tax, the inflationary rate adjustments will compel manufacturers to pass on the additional cost of the commodities to end users, further pulling down households purchasing powers even as they still struggle to recover from political heat-ups and pandemic.

“Spacing the implementation of tax adjustment, petroleum storage tariff reviews, and elimination of the fuel kitty at a difference of six months or a year would offer reprieve to the citizens,” says Mr Gitonga.

Price drop

As fuel prices remain costly in Kenya, the prices are declining in the global market, bringing to light the domestic policy bottlenecks that are financially choking households at the pump.

Data from the Central Bank of Kenya shows that the prices of Murban Crude Oil, mainly imported by Kenya, has dropped to $94.93 per barrel as of September 2022, compared to about $150 witnessed around last March.

Kenya’s economy is particularly dependent on diesel and such inflationary adjustments always inflate operation costs, which might force businesses to cut on the workforce to protect their working capital.

Worse, the National Treasury announced in June plans to gradually eliminate the fuel subsidy by the end this year. Having promised various populist intervention during the campaign, the incoming administration under President William Ruto, whose contested presidential win was upheld by the Supreme Court, is however expected to come under pressure to address the high cost of living without scraping the fuel kitty that has been a constraint to the public coffers.

Fuel prices remained unchanged in August to retail at KSh140.00 and KSh159.12 per litre of diesel and petrol, respectively, having increased by almost 30% in the past 12 months.

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