• Saturday, 22 June 2024
Hurt for hustlers as the state discontinues kerosene and diesel subsidies

Hurt for hustlers as the state discontinues kerosene and diesel subsidies

Low-income families will experience the impact of increased kerosene prices after the elimination of subsidies, resulting in a 9.4 percent rise in the product's cost, which will put a strain on their finances.

According to the recent assessment of petroleum prices for the period between May 15 and June 14, the Energy and Petroleum Regulatory Authority (EPRA) has increased the cost of kerosene in Nairobi by Sh15.19 per liter, bringing it to a total of Sh161.13.

In a press release on Sunday, EPRA announced the elimination of the subsidy on diesel and kerosene.

If Parliament approves a proposal in the Finance Bill 2023 to reinstate a 16 percent Value-Added Tax (VAT) on petroleum products, the situation could worsen starting in July. Currently, the VAT rate is at 8 percent.

The increased tax on kerosene will directly impact impoverished households that rely on it for cooking stoves and lanterns, as well as fishermen who use kerosene lamps for nighttime fishing.

Given that the prices of liquefied petroleum gas (LPG) and electricity are unaffordable for many rural households, the recent price hike for kerosene may lead to a shift towards using charcoal and firewood. This shift carries significant health and environmental consequences.

The Energy and Petroleum Regulatory Authority (EPRA) raised the price of diesel by 3.9 percent, resulting in a retail price of Sh168.4 in Nairobi. This price increase is significant as manufacturing industries and businesses heavily rely on diesel to operate machinery and transport goods. Consequently, fluctuations in diesel prices will have an impact on the prices of various goods.

In addition, consumers of petrol will experience an approximate 2 percent increase, with the new retail price in Nairobi being set at Sh182.7, up from Sh179.3.

These price hikes have sparked a strong reaction among consumers and advocacy groups due to concerns over the high cost of living, which has been devastating for households.

Consumer Federation of Kenya Secretary-General Stephen Mutoro expressed his apprehension about the sharp increase in fuel prices, stating that although they do not endorse long-term subsidies, the sudden rise will exacerbate the already dire economic situation and lead to unintended repercussions.

 

Mutoro believes that the implementation of such changes should have been gradual to minimize the negative effects. On the other hand, oil marketers have welcomed the decision as it provides them financial relief. They argue that the subsidy program tied up a significant amount of their cash, which hampered their day-to-day operations.

 

"Eliminating the entire subsidy system is an extremely positive step according to the oil marketers. Under the subsidy system, the government consistently held funds that could have been utilized for purchasing products, forcing many businesses to seek alternative financing methods. This led to significant challenges in financing and establishing outlets, causing considerable concerns," expressed Martin Chomba, Chairperson of the Petroleum Outlets Association of Kenya.

 

The government's actions have put poor households in a difficult situation due to the soaring prices of liquefied petroleum gas (LPG), which have risen by 31 percent in the past two years. The government's promise of lower prices starting from June is also uncertain.

President William Ruto stated on Sunday that the commitment to reduce the cost of a 6kg gas cylinder from approximately Sh2,800 to as low as Sh300 on June 1 will not be fulfilled unless the Finance Bill 2023 is approved.

Currently, there is no immediate way to eliminate taxes without going through the budgetary process. Achieving this reduction by June 1 is not feasible. To ensure a decrease in prices, we need to pass the Finance Bill in Parliament. Once the budget is approved, we will be able to lower the price of gas cylinders to a range of Sh300 to Sh500," explained President Ruto.

He stated that households would have experienced reduced gas cylinder prices by June, as he had promised, only if the proposal had been approved in the supplementary budget, which did not occur.

However, if Parliament approves the Finance Bill 2023 in its current state, the issue of high kerosene prices will worsen since it suggests increasing VAT on fuel products to 16 percent.

Addressing the matter on Sunday, the President justified the proposal by stating that the government aims to close existing loopholes that have allowed tax evasion due to inconsistencies with other products subject to VAT.

"We will be raising the VAT on fuel products to address the issue of differential rates, where some products are taxed at 8 percent while others are taxed at 16 percent. This discrepancy creates a problem in terms of integrity, as people exploit it to manipulate VAT figures. Both my economic team and Treasury have advised that we need to eliminate this loophole that people are taking advantage of," stated the President.

As a result of this tax adjustment, the government anticipates an additional revenue of approximately Sh50 billion, while also relieving itself of the subsidy burden.

The President emphasized that he is not imposing excessive taxes on Kenyans and hinted at the possibility of further tax increases in order to raise the country's tax-to-GDP ratio to 16 percent by 2023/24.

"I have heard many individuals claim that no country can tax itself into prosperity. That statement is true. However, accumulating debt and facing bankruptcy is not a viable option either. We are not burdening ourselves with excessive taxation. In fact, if we were to compare ourselves with other nations... my intention is to approach this gradually, following the example set by Mwai Kibaki," he explained.

Kenyans have a tendency to switch to more affordable cooking fuels when they encounter high prices for cleaner fuels. Recent data from the Kenya National Bureau of Statistics (KNBS) reveals that in the previous year, the demand for LPG (liquefied petroleum gas) in the country decreased by 10.1% to 338,800 tonnes, as LPG prices reached record levels due to disruptions caused by the Russia-Ukraine conflict, which affected global supply chains.

Although the government plans to eliminate the 8% value-added tax (VAT) on LPG through the Finance Bill 2023, Kenyans have not always experienced price reductions from oil marketers following similar policy changes. This was evident last year when the VAT on LPG was reduced from 16% to 8%, but consumers did not see a corresponding decrease in prices offered by oil marketers.

According to the Economic Survey 2023 published by KNBS, the average annual price of illuminating kerosene for domestic use rose by 27.1% to Sh127.38 per litre, while the average price of a 13kg cylinder of LPG increased by 31.1% to Sh2,990.41 in 2022.

The 2019 Census indicates that less than 25% of Kenyan households, which amount to 12 million, utilize LPG as their cooking fuel of choice.

According to the World Health Organization, a significant number of individuals lose their lives prematurely each year due to household air pollution caused by using inefficient stoves and appliances that rely on sources like wood, coal, charcoal, dung, crop waste, and kerosene for cooking.

In Nairobi's less affluent neighborhoods, it is frequently observed that residents resort to purchasing charcoal as a substitute fuel during difficult times. On the other hand, in rural regions, firewood has traditionally been the most affordable alternative.

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