Governments give subsidies to protect consumers by keeping prices low, but they come at a high cost. Governments might raise taxes or borrow more or lower spending to give subsidies. Removing subsidies and using the money in productive investments could promote a country’s growth without running into problems.
On Wednesday, Energy and Petroleum Regulatory Authority said the government had removed a Sh20.82 subsidy it was paying on each litre of petrol. This means the government would no longer pay fuel firms Sh20.82 for each litre of petrol they sell.
But the government will continue to subsidise diesel and paraffin. The government will use Petroleum Development Levy money to pay fuel firms for selling diesel and paraffin at prices lower than cost.
On Tuesday, President William Ruto said the government had paid fuel firms Sh60 billion as fuel subsidy in the last four months.
“If the subsidy continues to the end of the financial year [June 2023], it will cost the taxpayer Sh280 billion,” Mr Ruto said after taking oath as president of Kenya. He said Sh280 billion was same as what Kenya spends on development.
Mr Ruto said his predecessor’s subsidy on maize flour in July led the government to paying millers Sh7 billion in one month “with no impact.”
He said subsidies on consumer products distort markets and create uncertainty, including artificial shortages of the very products being subsidised.
IMF tells European governments to let fuel prices rise
International Monetary Fund’s working paper said European governments could not prevent the loss in real national income arising from high fuel prices. The fund told European governments to allow the full increase in fuels costs to pass to customers.
Europe’s governments have used measures to control prices, including subsidies, tax cuts and price controls to tackle rising energy cost.
“But suppressing the pass-through to retail prices simply delays the needed adjustment to the energy shock by reducing incentives for households and businesses to conserve energy and enhance efficiency,” the IMF said. “It keeps global energy demand and prices higher than they would otherwise be.”
In addition, the fund said the increasing cost of actions taken to control fuel prices was squeezing economies’ ability to raise and spend revenue.
When subsidies are removed, prices increase, public protests
Despite the potential gains, many countries have had difficulty reducing or removing subsidies, said the IMF. When reforms are made, prices increase, and this has often led to widespread public protests, it said.
The IMF said citizens refuse to support subsidy cuts if they are uncertain their governments would shift savings from cut subsidies to projects that would compensate them for high fuel prices.
Mr Ruto said high cost of production in Kenya had increased cost of living. He said his government would give farmers affordable fertiliser, seeds and other inputs.