State reverts to subsidies, cut VAT as fuel prices soar

The government has had to revert to subsidies and a cut in VAT to try to cushion consumers from historic fuel prices, as the impact of the Middle East war finally hits home.

Even so, pump prices for diesel and petrol have gone up to what was last witnessed in 2023 when they first crossed the 200 mark.

In the latest monthly review, the government has been forced to subsidise petrol by Sh4.92, but a litre has still gone up by Sh28.69, pushing it up to Sh206.97 in Nairobi.

This means a litre would have hit a record Sh211.89 up from Sh178.28.

Diesel, widely used in the industrial sector, energy generation, manufacturing, transport and agriculture sectors, has been subsidised by Sh20.30, but a litre has increased by Sh40.30, to retail at Sh206.84, and would have gone up to Sh227.14 from Sh166.54.

Pump prices for kerosene, which is used for lighting and cooking in poor households, remain unchanged at Sh152.78 per litre, meaning 100 per cent subsidy.

Mandera will have the highest fuel prices, where a litre of petrol will go for Sh229.15, up from Sh200.46, diesel Sh229.02, up from Sh188. 72 while kerosene will retail at Sh174.96.

The government has also reduced the Value Added Tax rate on super petrol, diesel and kerosene from 16 per cent to 13 per cent, Energy and Petroleum Regulatory Authority (EPRA) acting director general Joseph Oketch said yesterday.

This, he said, was “in order to cushion consumers from the high landed cost of petroleum products as a result of the escalated prices in the international market.”

“The government will further cushion the consumers through the Petroleum Development Levy (PDL) Fund by utilising approximately Sh6.2 billion to stabilise the pump prices,” Oketch said.

The landed cost for petrol went up to Sh107.24 per litre, Sh133.89 for diesel and Sh170.86 for kerosene, up from Sh75.42, Sh82.30 and Sh82 respectively.

“We wish to reiterate that as per the earlier directive from the government, the super petrol delivered by One Petroleum ex MT Paloma has not been included in the computation of the applicable prices,” Oketch said.

All three major Middle Eastern state-owned oil giants in the G2G deal with Kenya, that is, Saudi Aramco (Saudi Arabia), Abu Dhabi National Oil Company (ADNOC) (UAE) and Emirates National Oil Company (ENOC) (UAE), have been affected by the war, as crude prices crossed the $100 per barrel mark.

A rise in fuel prices now translates to high commodity prices as manufacturers are expected to pass on extra production and logistics costs to consumers.

Large-scale farming activities are also set for higher costs as a result of diesel. Fares are also expected to go up as the matatu industry and public transport sector at large pass extra costs.

“It is obvious that when fuel prices go up, operating costs go up, spare parts cost more from a manufacturing aspect and delivery costs. We will, however, be speaking to our members to make reasonable adjustments,” Matatu Owners Association president Albert Karakacha, told the Star.

Power bills in homes are also expected to go up as Independent Power Producers in thermal generation move to recover higher diesel costs.

“High oil costs will fuel inflation,” Kenya Association of Manufacturers CEO Tobias Alando said.

The country’s inflation is expected to go up from the 4.4 per cent recorded in March, which was a slight increase from 4.3 per cent in February.

These are the highest fuel prices since September 2023, when they crossed the historic Sh200 mark for the first time, with petrol in Nairobi rising to over Sh211 per litre.

These record highs were driven by the removal of subsidies and increased VAT.

Among key drivers was the increase in Value Added Tax (VAT) on petroleum products from eight per cent to 16 per cent and high landed costs.

Global inflation is expected to increase in 2026 because of higher energy prices and fertiliser costs attributed to the supply disruptions from the conflict.

During his post-Monetary Policy Committee briefing last week, Central Bank of Kenya governor Kamau Thugge noted that the Middle East war would have an impact on the economy.

“The growth of the economy is projected at 5.3 per cent in 2026 compared to the previous projection of 5.5 per cent, reflecting the emerging risks of the conflict in the Middle East on the performance of some key sectors of the economy,” Thugge said.

President William Ruto, on March 30, said the ongoing conflict in the Middle East is having a significant impact on the global economy, with Kenya not immune to these effects.

He, however, promised measures to moderate “any adverse effects” on the global oil price increases and ensure that Kenya maintains adequate supplies.

“Rising international oil prices are already affecting consumers globally. However, the Government-to-Government fuel procurement arrangement has cushioned Kenyans from immediate shocks,” Ruto had said earlier.

This strategic intervention, he noted, has mitigated price increases, ensured security of supply, and proven to be both prudent and forward-looking.