Kenya to change fuel pricing formular to reflect market conditions

The government wants to change the fuel pricing formular that sees the industry regulator fix retail prices every mid-month into a structure that reflects ‘market conditions’.

Treasury Cabinet Secretary Prof Njuguna Ndung’u told Parliament the government will use the long supply contracts negotiated with oil producing countries to change the model of pricing without revealing how the new formula will look like nor the impact on prices.

Petroleum pricing in Kenya is regulated by the Energy (Petroleum Pricing) Regulations (2010), which give the Energy and Petroleum Regulatory Authority (EPRA) the power to determine—according to a formula and on a monthly basis.

The maximum wholesale and retail prices of petrol, diesel, and kerosene. Prices are set, after consultation with the Ministry of Energy, on the basis of fuel costs, covering import, distribution, dealer’s margin, and taxes and levies.

While Kenya’s fuel pricing formula has traditionally passed international price increases fully onto consumers, domestic prices were maintained unchanged between October 2021 and February 2022 prompting the IMF to call for reforms of the pricing formular to give clarity on how subsidies to the vulnerable can be incorporated.

IMF said starting in 2021, a subsidy component had been added but a policy framework guiding application of those subsidies is lacking.

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“The objective of this arrangement is to allow a restructuring of the fuel pricing mechanism that will be dependent on market conditions. Currently, the pricing mechanism coordinates expectations of price revisions on the 15th of every month, a situation that does not reflect appropriate market conduct as well as encourage diverse market development paths in this sub-sector,” Prof Ndungu said in his budget speech.

Setting of Kenya’s fuel prices have remained opaque and erratic most of the time remaining discordant with global market prices due to tax components and need to cushion consumers during volatility.

This month Epra marginally reduced the cost of fuel by an average of Kes0.47 per litre even though global prices have come down.

International crude oil prices have declined by 24 percent in the last 12 months to a low of $79.55 (Kes11,113) per barrel in May 2023 from a high of $104 (Kes14,528) per barrel in June 2022.

Fuel prices which are expected to go up on the new tax measures doubling value added taxes from 8 percent to 16 percent is expected to push up inflation which rose to 8 percent in May up from 7.9 percent in April.

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