Kenya’s economy faces a slow down on the back of commodity price shocks resulting from the war in Ukraine, with the enduring effects of the Covid pandemic and drought further worsening the situation.
Since the start of the year, the government put in place a fuel subsidy to help reduce the fuel prices, and provide reprieve to citizens. The subsidy, although welcome, came at a cost: it put immense pressure on the country’s finances, leaving the government with few options by way of spending. President William Ruto has since scrapped the subsidy, which his government has termed unsustainable.
Already, consumers are feeling the impact of increased commodity and transport costs, which have gone up by between 20% and 30% after the incentive was removed.
Kenya spent an average of Sh11.86 billion monthly to keep fuel prices low for the six months to June 2022 as per data from Energy and Petroleum Regulatory Authority (EPRA). Diesel accounted for the largest share of the subsidy at Sh45.7 billion, followed by super petrol (Sh23.3 billion) and kerosene (Sh1.9 billion) in the six months. In total, the country incurred a cost of Sh71.17 billion to subsidise diesel, super and kerosene.
Create job and market incentives
Subsidies can be costly. There are also instances where they have been abused. An attempt to subsidise maize flour in the run-up to the August 9, 2022 election, for example, ended up flopping, as producers and retailers hoarded the commodity, creating artificial shortages – this even after a stabilisation programme cost taxpayers around Sh8.5 billion a month. The last time Kenya had a maize floor subsidy was in 2017, and that program took a similar trajectory: there was no compliance, with accusations of government officials out to make money engaged in racket schemes to create shortages. For consumers, getting the subsidised product was a tough affair.
For a subsidy to work, the government must amend its budget, plan for and allocate funds for that purpose. Since new government has stopped the fuel subsidy, for example, there aren’t many options for consumers but to bear the brunt of increased prices.
For the next few months to be smooth for Kenyans and the economy, the government must adopt tax and expenditure policies that will create incentives for savings and investment for the economy to continue expanding and create sustainable jobs.
It is only in high-productivity wage jobs, including investing in transport and electricity, upgrading skills and eliminating corruption, that the economy will grow and sustain itself. With more people in employment, the tax basket will expand, and government will have a sustainable tax base to allow it to cushion consumers when needed to.
Back to energy costs, market-based pricing will prevail for the foreseeable future, with the possibility that competition amongst oil marketers will work in favour of consumers. While this may create pain in the short term, it may just be what Kenya needs in the long-term.