The Treasury is actively seeking financial resources to reintroduce subsidies on retail fuel prices, reversing the government's previous stance. This move comes as ongoing conflicts in the Middle East continue to disrupt oil supplies, driving up global fuel costs.

Treasury Cabinet Secretary John Mbadi confirmed the government is exploring funding avenues but did not specify whether it would involve loans or adjustments to the national budget.

Background and Current Measures

  • Kenya withdrew fuel subsidies in 2022 under President William Ruto, who prioritized production subsidies over consumption subsidies to reduce government expenditure and manage debt.
  • Since then, the Energy Regulatory Commission has relied on the petroleum development levy, charged at Sh5.40 per litre, to stabilize fuel prices.
  • However, the levy fund has been exhausted due to heavy usage following the escalation of the Iran conflict in February 2024, which included the blockade of the Strait of Hormuz—a key global oil transit route.

Impact of Middle East Conflict

  • The International Energy Agency (IEA) reports that global oil supply is expected to drop by approximately 4.3 million barrels per day in 2024 due to the conflict, prolonging high fuel prices and inflationary pressures.
  • Following a breakdown in the US-Iran ceasefire and renewed tanker attacks, regional instability persists, further impacting fuel costs.

Government Response and Inflation

  • Kenya extended a VAT reduction on petroleum products from 8% to mid-October to mitigate the impact of volatile energy prices on households and businesses.
  • Inflation rose from 4.25% in February to 6.5% in July, driven partly by elevated fuel prices.
  • The government has also implemented a cross-subsidy, reducing diesel prices while maintaining petrol and kerosene prices to ease inflation pressures on petrol consumers, primarily the middle class.

Looking Ahead

With the 2027 General Election approaching, fuel prices and the broader cost of living remain critical issues. The Treasury’s search for subsidy funding highlights the challenges of balancing fiscal responsibility with public demand for affordable energy.