(Bloomberg) — Kenyan President William Ruto followed up on a pledge to remove a fuel subsidy that has further depleted the state’s already strained coffers, a move that’s likely to be unpopular with some motorists in the East African nation.
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Just a day after Ruto’s Sept. 13 swearing in, Kenya’s Energy & Petroleum Regulatory Authority scrapped a subsidy on gasoline, raising the cost by 13%. Critics of the price-relief measure have said the buffer protects those who can afford private cars.
The regulator retained diesel and kerosene subsidies, helping cushion low-income earners who use the latter fuel for lighting and cooking, and rely on public transport.
Ruto faces the dual tasks of stabilizing government finances and bringing surging living costs under control. Kenya’s public debt ballooned to 8.6 trillion shillings ($71 billion) in June, from 1.9 trillion shillings in 2013 when the previous administration came to office, and the International Monetary Fund classifies the country as being at high risk of debt distress.
The elimination of the subsidy on gasoline is a welcome move as it “recognizes the very limited fiscal space that Kenya has,” IMF country representative Tobias Rasmussen said in a text message.
Inflation may meanwhile be on track to hit double digits in the fourth quarter due to global price pressures, according to analysts including Razia Khan, Standard Chartered Bank’s London-based head of research for Africa and the Middle East.
The government had expected to spend 280 billion shillings on fuel subsidies through the end of the fiscal year in June, equivalent to what it budgeted for development, Ruto said in his inauguration speech.
“We expect the president to make a few unpopular policy decisions, as much as we also expect the opposite as he attempts to keep up the promise to reduce the cost of living,” said Renaldo D’Souza, head of research at Nairobi-based Sterling Capital Ltd. “It was clear from the onset that the fuel subsidy was unsustainable in the long run.”
A separate subsidy on corn, used to make a staple known as ugali, cost as much as 7 billion shillings in just one month, according to Ruto. Rather than targeting assistance at consumers, the new administration will seek to try and reduce food production costs and increase output by subsidizing inputs such as fertilizer and quality seeds, he said.
As a first step, 1.4 million bags of fertilizer will be offered to farmers for 3,500 shillings each from next week, 3,000 shillings less than the current cost.
“The action on fertilizer prices and helping to boost production is sound, but cannot on its own alter very near-term developments,” Khan said.
(Updates with IMF comment in the fifth paragraph)
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