The Hard Choice- High Fuel Prices, Subsidy And The Opportunity Cost- Alexander Nkosi

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Alexander Nkosi

THE HARD CHOICE- HIGH FUEL PRICES, SUBSIDY AND THE OPPORTUNITY COST

By Alexander Nkosi

In 2021, the total cost of fuel subsidy was USD67.4 million per month or USD809 million per year. In kwacha this is K13 billion, higher than our agriculture budget for 2023 and over 50% of the total education budget for 2023. Note that at this point the price of crude oil on the international market was lower than it is today. So to bring down the price of fuel to 2021 level or below, we need to spend more than K13 billion, probably close to K20 billion. Just to keep it at K17, the previous government left around USD600 million arrears owed to Oil Marketing Companies and borrowed heavily to cover the gap left by suspension of taxes on fuel and petroleum products.

Government has decided to remove the fuel subsidy and spend the money on: hiring and equipping agriculture extension officers, establishing farm blocks for food production and processing, expanding allocation to FISP, constructing 16 irrigation dams, economic empowerment for SMEs, doubling allocation to drugs and medical equipment, hiring more health workers, and improving quality of education through hiring more teachers.

Do we have any options? Below are some options and analysis of why it is difficult to implement them.

1. Reverse mining taxes so as to raise more money to pay for the fuel subsidy. In 2022, both copper production and prices have gone down compared to 2021. Any reversal in tax adajustments made in the mining sector would be met by a further reduction in output leading to a reduction in total revenue from the sector. Mining firms are known for such negotiation tactics. So this won’t give us the K13 billion we would need for the fuel subsidy.

2. In 2023, we have increased allocation to agriculture, education, health and dismantling arrears. Do we cut down on- agriculture spending, allocation to dismantling arrears and allocation to medical supplies- to fund the fuel subsidy? Then how do we grow?

3. Do we borrow more on the domestic market to subsidise fuel? In 2023 total borrowing has gone down by K18.3 billion. This is good for debt sustainability and debt restructuring negotiations. No one will take us seriously if we are asking for debt restructuring while increasing borrowing. Reduction in domestic borrowing will help push down interest rates. However, if government increases domestic borrowing, interest rates will go up and the private sector which essentially should drive economic growth and job creation will be hard hit.

Reducing prices of fuel would benefit both producers and consumers. Good as it might be, keeping fuel prices low at this point would be very expensive, the opportunity cost will be very high. We can’t have it all, we have to give up something. It is a question of what represents the best investment under the current circumstances. Kenya’s new President abolished fuel subsidies and increased agriculture subsidies.

Thank you.

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