IMF Criticizes Kenya’s Fuel Subsidy Re-Introduction, Warns of Budget Distortion

The International Monetary Fund (IMF) has criticized Kenya for re-implementing the fuel subsidy scheme, expressing concerns that the lack of funds to pay oil marketers could distort the budget.

Despite a previous commitment by President William Ruto in 2022 not to subsidize pump prices, the government reintroduced the subsidy, preventing petrol and diesel prices from reaching higher levels in October 2023.

The IMF argues that the subsidy was applied without available funds, as the Treasury has yet to pay oil marketers at least Ksh9 billion ($55.6 million) accumulated from the previous year. President Ruto’s decision to reinstate subsidies goes against conditions set by the IMF for accessing loans.

Petrol and diesel prices, which were Ksh217.36 ($1.34) and Ksh205.47 ($1.27) respectively in Nairobi in October 2023, remained lower than the potential Ksh220.43 ($1.36) and Ksh217.11 ($1.34) due to the subsidy. However, the IMF disapproves of the decision, emphasizing that the removal of the subsidy was a key condition for a 38-month budget support scheme.

The IMF criticizes the prolonged process of forming a taskforce and delays in implementing decisions regarding fuel pricing.

The removal of the subsidy in May of the previous year led to record-high pump prices, crossing the Ksh200-mark later in the year due to a combination of subsidy removal and a VAT increase to 16 percent.

Kenya’s administration, faced with rising fuel costs, chose to reinstate the subsidy, prompting the IMF to raise alarms over the lack of budgeted funds and potential distortions in the country’s financial plans.

The ongoing disagreement highlights the challenges and consequences associated with balancing domestic economic policies and meeting international financial commitments