- On 14 September 2023, the Energy and Petroleum Regulatory Authority (EPRA) announced record-high fuel prices for the September-October regulation cycle.
- As Kenyans struggle with high fuel prices, the government also struggles with a depreciating shilling and a shortage of foreign exchange reserves.
- The International Monetary Fund (IMF) expressed reservations that the fuel deal with the Gulf might expose Kenya’s taxpayers to currency-related costs.
For many Kenyans, life was unbearable during former President Uhuru Kenyatta’s reign. But just one year after President William Ruto came to power, life is getting more onerous. High taxation, the depreciation of the shilling against the dollar, and record-high fuel prices have highlighted the last few months. This has painted a grim picture of Kenya’s future and shattered citizens’ hopes for economic reinvigoration.
Record-high fuel prices
On September 14, 2023, the Energy and Petroleum Regulatory Authority (EPRA) announced record-high fuel prices for the September-October regulation cycle. A litre of super will now retail at Kes 211.64, diesel at Kes 200.90, and Kerosene at Kes 202.61. This represents an increase of Kes 16.96, Kes 21.32, and Kes 33.13, respectively, in the new prices announced last midnight.
Fuel prices in Kenya have risen steadily in the last 12 months under President Ruto’s administration, whose first economic policy shift was lifting the fuel subsidy. The subsidy had kept the price of petrol, diesel, and kerosene the lowest in eastern Africa under President Uhuru’s reign.
The new fuel prices are the highest since Kenya started regulating pump prices. The increase will worsen inflationary pressures, worsening Kenya’s economic woes even as the shilling continues the worrisome freefall.
Kenya’s economy relies heavily on fuel for public transport, manufacturers, and farmers. Thus, the increased fuel prices will heighten inflationary pressures, likely triggering more public outrage over the insistently high cost of living.
Dr Ruto had scrapped the fuel subsidy last year, indicating that it had distorted the market and was budget-disruptive. The International Monetary Fund has also remained on Kenya’s case, pressuring the government to implement measures to ease the strain on the Exchequer. Moreover, the doubled Value Added Tax on petroleum products to 16 percent has significantly affected fuel prices. The proposal to add a further 2 per cent to align with East African rates will lead to further hikes in the coming months if parliament adopts it by the end of the month.
The impact of global fuel prices
Kenya’s record-high fuel prices appear to reflect the global trend. For instance, in the US, oil prices climbed on 14 September to their highest in 2023, as expectations of tighter supply outweighed concerns about weaker economic growth.
A day earlier, the International Energy Agency (IEA)reported that Russia and Saudi Arabia’s extended oil output cuts will cause a deficit in the global market. Before the IEA report, the Organization of the Petroleum Exporting Countries (OPEC) issued updated predictions of solid demand while pointing to a 2023 supply deficit if production cuts are maintained.
“The market is getting increasingly nervous about the sufficiency of supply,” observed John Kilduff, partner at Again Capital. “Russia and Saudi are acting in a way that could materially constrain supplies as we get into the peak northern hemisphere demand season for the winter period,” Kilduff added.
The European Central Bank raised its key interest rate to a record peak but signalled this was likely its final move to tame inflation. Moreover, investors see a 97 percent possibility that the US Federal Reserve will keep the interest rates steady in its subsequent deliberation on 20 September, according to the CME FedWatch Tool.
Meanwhile, China’s central bank indicated it would cut the cash that banks must hold as reserves for the second time in 2023 to boost liquidity and support its economic recovery. China is the world’s second-largest oil consumer, and its economic recovery has remained choppy, worrying markets about demand.
Foreign exchange woes and the depreciating shilling
As Kenyans struggle with high fuel prices, the government also struggles with a depreciating shilling and a shortage of foreign exchange reserves. Since Kenya’s oil and fuel importers use US dollars to buy fuel, the foreign exchange woes have directly impacted the country’s fuel supplies and, by extension, the country’s fuel prices.
The situation could worsen without decisive policy action. One of the problems is that Kenya embarked on an aggressive infrastructure expansion under President Uhuru, becoming indebted to an environment where the balance of trade has deteriorated significantly.
Kenya, just like other African countries, needs a higher production capacity. This makes the country a net importer and a relatively significant importer of almost everything, from manufactured goods to consumables. And since the US dollar is historically the favored hard currency in international trade, the demand in Kenya for dollars to buy imported goods, including fuel, has remained high.
The depreciation of Kenya’s currency has not made things any better. The shilling has remained in a free fall, considerably losing value against the dollar. A weaker shilling will keep the price of imports, including fuel, elevated. This will inevitably push up the cost of goods and services and inflation, which stood at 6.7 per cent in August. A weaker shilling will also impact the government’s ability to meet its debt obligations, with major loans maturing soon.
Kenya’s fuel deal with gulf states
A few months ago, Kenya negotiated a government-backed fuel import credit scheme with the Gulf states. However, Kenya’s foreign exchange woes had threatened the Gulf States fuel import deal. This is after the International Monetary Fund (IMF) expressed reservations that the fuel deal with the gulf might expose Kenya’s taxpayers to currency-related costs.
Kenya’s Treasury Cabinet Secretary Njuguna Ndung’u had indicated that the government would step back to allow private sector players, including oil marketing companies (OMCs), banks, and credit insurance providers, to run the scheme.
The plan, developed by the Kenyan government in collaboration with the governments of Saudi Arabia and the United Arab Emirates, sought to relieve forex pressures by avoiding the purchase of fuel, the nation’s single-largest import, on the spot market and delaying the demand for dollars, estimated at around $500 million per month.
Under the arrangement, the Treasury issued comfort letters to exporters and regional banks for fuel purchases from the governments of Saudi Arabia and the United Arab Emirates by approved oil importers, with an assurance to ultimately honor the obligation.
Foreign exchange valuation losses
The IMF believed the government would remain exposed if the foreign exchange (FX) valuation losses were not passed on to consumers, notwithstanding the Treasury’s insistence that such letters of comfort do not qualify as government assurances of private debt.
The IMF stated that the fuel import deal should be redesigned after the inaugural rollout period so that the private sector covers all risks. According to the IMF, should fuel prices at the pump not be changed to pass along any forex valuation losses to final consumers fully and to provide access to dollars to cover any potential shortage of foreign currencies in the domestic market, the government would be exposed to demands on the national budget, according to the IMF.
Nevertheless, the EPRA boss while announcing the change in fuel prices indicated that the government had successfully re-negotiated the fuel payment premiums with the three with the Gulf States’ oil companies supplying the country with fuel as part of the G2G oil import arrangement.
The rise in fuel prices will affect the cost of essential commodities such as food and all other commodities that depend on such rates. The government moved away from fuel price stabilisation, prompting a consistent spike in the last 12 months.
As indicated by EPRA, the current prices will run the regulation cycle from 15 September to 14 October 2023. The prices are reflective of the global trend in fuel price changes. According to OPEC, there is a prediction for solid demand and a pointer to a 2023 fuel supply deficit if production cuts are maintained.
The depreciating shilling and Kenya’s foreign exchange woes will complicate the situation further. Consequently, the citizens now stare at a higher cost of living as the country’s economic woes worsen. This paints a grim outlook and fades any hopes of economic reinvigoration under President Ruto’s administration. It is time to face the reality. There are few quick fixes to the economic struggles.