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Kenya finds itself embroiled in yet another dispute that yields little more than a Pyrrhic victory: The strike in the transport sector in response to the recent increase in fuel prices. The grievance is understandable: Petroleum prices have climbed to unprecedented levels, exerting acute pressure on businesses and households alike.
Yet these are far from ordinary times. The conflict in the Middle East has disrupted global energy supply chains, constraining the flow of petroleum products not only to Kenya but to nearly a fifth of the world market.
In such circumstances, striking over a problem largely beyond the government’s control may provide a measure of public catharsis, but it is unlikely to achieve the desired end: lower prices at the pump.
Understanding how fuel pump prices are determined in Kenya is essential. They are shaped by four principal components: Platts benchmarks, the global petroleum industry’s standard for price discovery; supplier premiums, which cover the logistical, operational, and handling costs involved in delivering fuel; the margins charged by oil marketing companies; and taxes imposed by the Kenyan government.
Platt benchmarks are set by global market dynamics, beyond the reach of any single government, including Kenya’s. Premiums, by contrast, are negotiable and typically agreed between suppliers and governments.
Under Kenya’s Government-to-Government fuel arrangement with the UAE and Saudi Arabia, premiums were fixed at predetermined rates. However, the ADNOC, one of the principal Gulf refiners supplying Kenya, has invoked a force majeure clause, suspending fuel production and shipments in response to the intensifying conflict in the Middle East.
Kenya’s Energy and Regulatory Authority has raised the profit and operational margins allowed to oil marketers in an effort to shield fuel dealers from mounting inflationary pressures and the escalating costs of maintaining inventories.
A recent study found that operating expenses for fuel retailers had surged since the last substantive review in 2018. Without an upward revision of these margins, many private marketers would have struggled to remain viable, raising the prospect of an exodus from the market to the detriment of fuel supply chain stability in the country.
Taxes and levies constitute one of the limited areas in which the government retains discretionary authority, albeit within tightly circumscribed bounds. Broadly, they fall into two categories: Fixed specific charges levied per litre and ad valorem instruments applied as percentages.
The former includes a series of sector-specific levies such as the Road Maintenance Levy, Excise Duty, the Petroleum Development Levy, the Petroleum Regulatory Levy, the Anti-Adulteration Levy, and the Merchant Shipping Levy. The latter category comprises Value Added Tax (VAT), the Railway Development Levy, and the Import Declaration Fee.
Each of these instruments is designed to fulfill a distinct policy objective, and most have been refined over decades of fiscal adjustment and administrative learning. Altering any one of them, therefore, is not a neutral act: The effects ripple through the economy and ultimately reach households.
One decision, however, stands out in its fiscal consequences: Reduction of VAT from 16 per cent to 8 per cent. While politically expedient, it has created an estimated revenue shortfall of Sh32 billion.
This gap will inevitably need to be closed through reallocations from other budgetary priorities, most likely already stretched sectors such as health and education.
Mr Khafafa is a public policy analyst
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Kenya finds itself embroiled in yet another dispute that yields little more than a Pyrrhic victory: The strike in the transport sector in response to the recent increase in fuel prices. The grievance is understandable: Petroleum prices have climbed to unprecedented levels, exerting acute pressure on businesses and households alike.
Yet these are far from ordinary times. The conflict in the Middle East has disrupted global energy supply chains, constraining the flow of petroleum products not only to Kenya but to nearly a fifth of the world market.
In such circumstances, striking over a problem largely beyond the government’s control may provide a measure of public catharsis, but it is unlikely to achieve the desired end: lower prices at the pump.
Understanding how fuel pump prices are determined in Kenya is essential. They are shaped by four principal components: Platts benchmarks, the global petroleum industry’s standard for price discovery; supplier premiums, which cover the logistical, operational, and handling costs involved in delivering fuel; the margins charged by oil marketing companies; and taxes imposed by the Kenyan government.
Platt benchmarks are set by global market dynamics, beyond the reach of any single government, including Kenya’s. Premiums, by contrast, are negotiable and typically agreed between suppliers and governments.
Under Kenya’s Government-to-Government fuel arrangement with the UAE and Saudi Arabia, premiums were fixed at predetermined rates. However, the ADNOC, one of the principal Gulf refiners supplying Kenya, has invoked a force majeure clause, suspending fuel production and shipments in response to the intensifying conflict in the Middle East.
Kenya’s Energy and Regulatory Authority has raised the profit and operational margins allowed to oil marketers in an effort to shield fuel dealers from mounting inflationary pressures and the escalating costs of maintaining inventories.
A recent study found that operating expenses for fuel retailers had surged since the last substantive review in 2018. Without an upward revision of these margins, many private marketers would have struggled to remain viable, raising the prospect of an exodus from the market to the detriment of fuel supply chain stability in the country.
Taxes and levies constitute one of the limited areas in which the government retains discretionary authority, albeit within tightly circumscribed bounds. Broadly, they fall into two categories: Fixed specific charges levied per litre and ad valorem instruments applied as percentages.
The former includes a series of sector-specific levies such as the Road Maintenance Levy, Excise Duty, the Petroleum Development Levy, the Petroleum Regulatory Levy, the Anti-Adulteration Levy, and the Merchant Shipping Levy. The latter category comprises Value Added Tax (VAT), the Railway Development Levy, and the Import Declaration Fee.
Each of these instruments is designed to fulfill a distinct policy objective, and most have been refined over decades of fiscal adjustment and administrative learning. Altering any one of them, therefore, is not a neutral act: The effects ripple through the economy and ultimately reach households.
One decision, however, stands out in its fiscal consequences: Reduction of VAT from 16 per cent to 8 per cent. While politically expedient, it has created an estimated revenue shortfall of Sh32 billion.
This gap will inevitably need to be closed through reallocations from other budgetary priorities, most likely already stretched sectors such as health and education.
Mr Khafafa is a public policy analyst
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By Leonard Khafafa