Reprieve For SMEs As EPRA Retains Fuel Prices

The effects of fuel prices hikes can be observed with the consistent rising cost of business.  The first impact reflects the role of transportation in determining the price of goods. Most micro enterprises and SMEs are dependent on hired transport to fetch items from wholesalers and manufacturers. Although the cost of these services increases as the fuel price increases, there is good evidence to suggest that these prices are both downwardly “sticky” (i.e. that they do not go down when the petrol price declines) and that transport service providers take advantage of general perceptions about rapidly rising fuel prices to increase their margins.

The result is that small business owners who are dependent on these forms of transport probably face disproportionate transport costs increases, compared to bigger businesses that control their own logistics. This reduces the competitiveness of the smaller businesses.

The second impact is through the regulatory response to inflation. Higher interest rates reduce the disposable income of consumers, by raising debt service costs. As consumers spend more of their disposable income on servicing debt, so they have less to spend on other items.

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The third issue for small businesses arising from higher inflation is that, generally, they are not in a position either to negotiate price concessions from manufacturers or wholesalers or to pass inflationary costs on to their consumers. While it is, of course, true that lower consumer expenditure affects all business; small businesses are generally in a much weaker position to ride out periods of reduced consumer spending. The smaller the business, the more vulnerable it is to this.

Kenyans have been handed a reprieve after the government retained fuel prices at the same levels as last month’s but slashed margins for oil marketing companies. In this costly action from the State, SMEs will be spared a hike of about KSh 4 per liter of super petrol and KSh 3 per liter of diesel this month, with the National Treasury expected to pick the tab in the coming weeks. This is a relief to them in terms of transporting their products to and from the market places whereby if the fuel prices had hiked the transportation costs would have hiked too.

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It is not yet clear how much the government will pay for the relief even though in April this year, a similar initiative by the State cost the taxpayer KSh 1.4 billion. The new retail prices announced yesterday revealed that the Energy and Petroleum Regulatory Authority (EPRA) retained the prices of super petrol at KSh 127.14 per liter, diesel (KSh 107.66) and kerosene (KSh 97.85) in Nairobi.

This is despite the cost rise of crude oil, which has risen to $73 (Sh7, 811) per barrel yesterday compared to an average of $63.35 (Sh6, 778) in June. It is also not clear how the government is funding the pump price stabilization initiative as it cannot draw from a kitty set up for this purpose owing to a lack of enabling legal framework.

Motorists currently pay Sh5.40 into the Petroleum Development Levy Fund – a fuel price stabilization kitty. The levy has been subjected to controversy, having been increased from 40 cents in July 2020 with the Petroleum Ministry saying it cannot tap the fund without enabling legislation.
These attempts to stabilize the cost of fuel the last few months has however not cushioned Kenyans as well as the SMEs from the high cost of living.

According to EPRA, the cost of fuel, particularly super petrol, remains high and only a few cents shy of the record high of Sh127.8 per liter seen in September 2018. This was when the government imposed a 16 per cent VAT on petroleum products but was later revised to eight per cent

Costly crude is attributed to signs of demand growth as the global economy recovers from the Covid-19 economic fallout. The relief news brings hope to the MSMEs that in the near end year the economy might come in favor of them after all the challenges the pandemic brought along to the business sector.

Mombasa, Kenya.

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