Withdrawal of Fuel Subsidy in Kenya on Grounds of Unsustainability

The partial elimination of fuel subsidies, which caused diesel and gasoline prices to reach an all-time high, resulted in savings for the Treasury of approximately Sh9.49 billion. The same day the newly elected president declared subsidies unsustainable, the commission eliminated the gasoline subsidy, which may have increased inflationary pressure. It reduced the reliefs on paraffin and gasoline to Sh26.25 and Sh20.82, respectively, and for the first time in a year, eliminating an Sh20.5 per liter subsidy on gasoline (Rentschler & Bazilian, 2017). As the new leadership seeks to end Government discounts on petroleum goods, this has decreased the weight of the subsidy from Sh14.5 billion to Sh5 billion.

Sections 15 and 107 of the Public Finance Management ACT require the federal and county treasuries, respectively, to implement the standards of financial sustainability to ensure sensible fiscal discipline on the expenditure of public monies like the subsidization of fuel. Specific requirements were added to limit the resources used to cover ongoing expenses. As a result, most of the PFM Act’s requirements are designed to limit the amount of money used for development. According to the legislation, both levels of government must ensure that specific budgetary requirements are followed. However, according to our research, county governments’ adherence to these requirements may be influenced by several external circumstances(Nowag et al., 2021,1044). Several budget guidelines are outlined in the Public Finance Management Act of 2012 and the 2010 Kenyan Constitution to control how public funds are distributed and spent by federal, state, and local officials. For instance, Article 210(2) and (3) of the 2010 Constitution of Kenya mandates that county governments get at least 15% of the latest recent inspected and authorized revenue from the entire central government each fiscal year(Rentschler & Bazilian, 2017). This cap was implemented to guarantee that the sub-national administrations would get a specified minimum sum of money to operate. Additionally, it was designed to restrict the national state’s latitude in deciding how much funding to transfer to cities and counties.

A permanent organization with a legislated or executive obligation to evaluate the government’s budget laws, strategies, and effectiveness against economic objectives, including the long-term allocation of public finances and short- to medium-term economic growth, is referred to as the fiscal council. By approving macroeconomic and fiscal predictions during the budget process, fiscal councils increase the credibility of anticipated projects like the withdrawal of the fuel subsidy in Kenya(Rentschler & Bazilian, 2017). In addition, the fiscal councils can be assigned duties to oversee the observance of regulatory frameworks wherever they are formed. Therefore they help to assess the intervention impact of the government in Kenya for long-term sustainability.

The Inter-temporal budgetary constraint is the consumption behavior of consumers today and future; hence it is the budget constraint over time. The intertemporal budget constraint shows the trade-off between consuming in the present and consuming in the future. The consumer’s choices about this transfer will determine how much he saves and borrows (Oxford Analytica, 2022). A sustainable deficit is when the debt growth of a country does not exceed the economic growth rate. Therefore it means that the sustainable defect is when the country can meet if daily and future expenses without defaulting. The debt sustainability is calculated as ( ( r − g ) / ( 1 + g ) ) b ( − 1 ) ((r-g)/(1+g)) b(-1) ((r−g)/(1+g))b(−1) where r is the interest rate while the gg is the Gross Domestic Product and b is the borrowing cost.

Based on the report by the IMF in the surveillance cost article, Kenya’s debt is manageable, and the fiscal austerity planned under the IMF-supported strategy would improve its debt trends. The danger of debt hardship is still regarded as high, even though anticipated monetary stimulus will help address debt weaknesses made worse by the international COVID-19 disaster. Excessive deficits from the past and the present shock, along with the pandemic’s severe impact on exports and growth, have worsened solvency and liquidity debt indices, especially when compared to Kenya’s existing size to service its debt evaluated as medium (Oxford Analytica, 2022). As fiscal consolidation moves forward and exports and output recuperate from the worldwide shock, Kenya’s borrowing metrics will improve, though recovery is notably modest for factors relating to exports(Rentschler & Bazilian, 2017). From 2020 to 25, the mean PV debt-to-GDP ratio is 62.8 %, with 0.3 percent GDP growth higher than the average value indicated at the time of the Agreement for the RCF (Kenya and the IMF, 2022). According to projections, public sector indebtedness will rise from 62.4 percent of GDP in 2020 to 64.2 percent in 2022 before gradually declining. It continues to be above the cutoff until 2027 (Nowag et al., 2021,1040). The PV of government borrowing ratio would rise from 360 percent in 2020 to 373 percent in 2021, accompanied by deficit reduction under the plan, including national sustainable development initiatives, before steadily dropping to 248 % in 2030 and 105 % in 2040.

Source IMF Country Report

The exportation in Kenya also has weaker global energy costs, which helped the account balance operate well. Tourism revenues decreased due to COVID-19, although remittance had an excellent performance. Staff predicts a stable current account surplus over the medium to long term, which will be aided by exports that are recuperating from the COVID-19 impact and modest import demand as the pace of development spending, which has a significant import element, remains stable (Irungu et al., 2020). According to the foundation, various sources, including financial and non-financial company borrowing, are anticipated to be used to cover the current account shortfall.

There is an announced change in spending and tax in Kenya. A micro policy reduces the corporate tax from 12% to 7%. The Alternate Minimum Tax for collaborative learning will be 15%. 30% tax will be applied to earnings from the exchange of digital assets like cryptocurrency (Oxford Analytica, 2022). All other deductions are prohibited except the cost of purchasing digital products.

The sustainable development goal will be indicated in reducing poverty in non-developed areas. The indicator of the Kenyan government on the need to achieve the sustainable development goal is through the enhancement of suitable allocation funds to cater to the needs of people in low-developed areas.

The impact of the policy on the removal of fuel subsidies in Kenya would result in a high level of national poverty. Therefore the consumer’s saving habit will deteriorate, resulting in more borrowing. Therefore inter-temporal sustainability will not be upheld in the economical running of the country. On the other hand, the removal of the subsidy on fuel will make the country’s deficit to be unsustainable. The input costs will increase, hence increasing the consumer’s production costs, resulting in the government’s inability to meet the consumers’ needs.

Reference list

Irungu, W.N., Chevallier, J. and Ndiritu, S.W., 2020. Regime changes and fiscal sustainability in Kenya. Economic Modelling, 86, pp.1-9.

Kenya and the IMF. IMF. (n.d.). Retrieved November 25, 2022, from https://www.imf.org/en/Countries/KEN

Nowag, J., Mundaca, L. and Åhman, M., 2021. Phasing out fossil fuel subsidies in the EU? Exploring the role of state aid rules. Climate Policy, 21(8), pp.1037-1052.

Osoro, S., 2016. Effects of budget deficit on economic growth in Kenya (Doctoral dissertation, University of Nairobi).

Oxford Analytica, 2022. Kenya fuel subsidy shift will divide opinion. Emerald Expert Briefings, (oxan-es).

Rentschler, J. and Bazilian, M., 2017. Policy monitor—principles for designing effective fossil fuel subsidy reforms. Review of Environmental Economics and Policy.