Fuel Subsidy Program Unsustainable As Average Landed Cost Continue Rising

Given the continuous increase in the average landed costs of fuel locally, the fuel subsidy program by the National Treasury in Kenya stands at risk of being depleted and is unsustainable.

This is evidenced by the increased compensation amounts, which further increase the possibility of depletion.

Since the beginning of the year, global fuel prices have continued to increase, recording a 34.5 percent rise to USD 105.0 per barrel, from USD 78.0 per barrel recorded on 1st January 2022.

This is majorly driven by persistent supply chain constraints worsened by the geopolitical pressures occasioned by the Russian invasion of Ukraine.

In Kenya, for instance, super petrol and diesel prices for the period between (15th March to 14th April 2022) increased by 3.9 percent and 4.5 percent to 134.7 shillings per litre and 115.6 shillings per litre, from 129.7 shillings per litre and 110.6 shillings per litre, respectively. However, the price of Kerosene remained unchanged at 103.5 shillings per litre.

According to the Energy and Petroleum Regulatory Authority (EPRA), this is the first increase in Super Petrol and Diesel since October 2021. The prices are the highest ever recorded in the country.

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Increase in fuel prices in the country is linked to various factors, including;

1. An increase in the average landed costs of Super Petrol by 13.3 percent to USD 676.4 per cubic meter in February 2022.
2. An increase in the average landed costs of Diesel by 11.7 percent to USD 677.3 per cubic meter in February 2022.
3. An increase in the average landed costs of Kerosene by 15.9 percent to USD 619.6 per cubic meter in February 2022.
4. The depreciation of the Kenyan shilling during the period by 0.2 percent to 113.8 shillings in February 2022

Despite the additional 24.9 billion shillings to stabilize oil market prices and the rationalization of Capital Expenditure, the National Treasury would have to disburse 15.0 billion shillings more to meet the full fuel subsidy in the review period.

The compensation amounts for March 2022 increased by 40.3 percent, 18.3percent, and 69.4 percent to 20.4, 27.6, and 26.9 shillings per litre from 14.5, 23.3, and 15.9 shillings for Super Petrol, Diesel, and Kerosene, respectively, in February 2022. As such, the additional amount to the program would be depleted in two months

Additionally, the average monthly subsidy for the past six months starting October 2021 is 14.7 shillings per litre for Super Petrol, 19.4 shillings per litre for Diesel, and 17.2 shillings per litre for Kerosene.

Due to the supply chain constraints in the global fuel markets, there are expectations that the sustained high fuel prices will trickle down to our economy soon.

And with fuel prices being a significant input cost in the majority of Kenya’s sectors such as manufacturing, transport, and energy, the increasing fuel prices is likely to exert upward pressure on the inflation basket, with fuel being a major contributor to Kenya’s headline inflation and an elevation in the cost of living.