Beyond fuel subsidy smokescreen: What are the real solution?

The Energy and Petroleum Regulatory Authority (EPRA) published latest fuel prices with notable increases of  Sh9 per litre pushing the cost of super , diesel and kerosene to Sh159.12 , Sh140 and sh 127, respectively in Nairobi.

The national treasury put out statement arguing that continued support of low fuel prices through subsidies was proving not be sustainable for several reasons among which are; crowding out investment in productive sectors, escalating public debt to unsustainable levels among others.

The national treasury further argues that it intent to gradually reduce fuel subsidies which will give fiscal headroom for the government to invest in productive sectors that support the most vulnerable such as fertiliser subsidies, universal health coverage and subsided primary and secondary education among others.

Whilst these proposal on face value seem rational but fails to appreciate the full extent of the challenge faced by ordinary Kenyans and the radical changes needed to address their plight.

For starters fuel is a major input to critical sectors of the economy such as agriculture, manufacturing and transport and logistics among others. Focusing on agriculture alone the sector contributes on average over  50 percent of Kenya’s GDP (22 percent directly and 28 percent indirectly) and accounts for 60 percent of employment and 65 percent of exports according to the world bank.

The reality is the pedestrian solution of fertiliser subsidies to the agricultural sectors should wary every Kenyan as to the intention of government to sort out the challenges bedevilling our economy. A quick analysis as to the challenges facing the agriculture sector will show that the sectors growth is majorly driven by horticulture and other cash crops with low production of cereals which are largely imported (impacting on cost of living similar to fuel).

Literature review highlight the following key challenges facing the sector; Land and population pressures with the average farm size reducing leading to significant constraints on production for smallholders farmers, sub optimal agricultural research and development and agricultural extension services, access to  markets, access to credit , climate change, soil fertility and land degradation, public expenditure( Kenya is not meeting African Union commitments on public spending in agriculture, and spends less than its immediate neighbours. Its subsidy schemes are regressive and distortionary)

The conversation about scrapping fuel subsidies in order for government to use the funds optimally to cushion the ordinary mwananchi must be sincere and well thought out rather that knee jerk as is always the case.

Given that there are factors beyond the control of government in terms of oil price, focus must be on factors that are within its control and effective strategies deployed to remedy the situation.

Three major factors come into play in fuel price; fuel landed cost (paid in US dollars), taxes and levies and profit margin.

In the short term government can create fiscal headroom to support the subsidy through ; re-evaluation of current investment and cutting back, cutting back on non-essential recurrent expenditures such travel etc, clamping down on wastage especially through corruption and strengthen budget monitoring and evaluation, cut back on taxes and levies on petroleum.

In the medium term to long term government must seriously support the agricultural sector especially in primary production of cereals which have an effect on cost of living for the poor, agro processing, targeted market value addition as well as a sustainable export strategy linking global markets with Kenyan SMEs in manufacturing