Kenya Faces Higher Fuel Costs as Subsidy Fund Runs Dry Despite Tax Relief Extension
Kenyan motorists, households and businesses are facing increased financial pressure following the withdrawal of government fuel subsidies, as dwindling public funds limit the State’s ability to cushion consumers against rising petroleum prices.
Kenyan motorists, households and businesses are facing increased financial pressure following the withdrawal of government fuel subsidies, as dwindling public funds limit the State’s ability to cushion consumers against rising petroleum prices.
The government has relied on the Petroleum Development Levy (PDL) Fund to stabilise pump prices, particularly during periods of rising international oil costs. However, sustained spending on subsidies has depleted the fund, leaving consumers more exposed to fluctuations in the global energy market.
The pressure has intensified amid disruptions to international oil supplies linked to escalating tensions in the Middle East, which have pushed up the cost of importing petroleum products into Kenya.
Fuel Prices Rise Across the Country
The latest price adjustments announced by the Energy and Petroleum Regulatory Authority (EPRA) have raised the cost of petrol, diesel and kerosene, increasing the burden on motorists and households that depend on petroleum products for transport, cooking and other daily activities.
In Nairobi, a litre of super petrol rose by KSh12.93 to KSh226.96, while diesel increased by KSh9.90 to KSh227.76. Kerosene recorded a sharper increase of KSh28.49, bringing its price to KSh219.85 per litre.
The increases are expected to affect more than motorists. Higher diesel prices could raise transport and distribution expenses, with businesses potentially passing some of the additional costs to consumers through increased prices for goods and services.
Farmers, public transport operators and manufacturers are also vulnerable because of their reliance on fuel to move goods, operate machinery and support production.
Subsidy Fund Under Pressure
The Petroleum Development Levy Fund has been a key instrument in the government’s efforts to moderate fuel prices whenever international market conditions threaten to make petroleum products unaffordable.
The fund is financed through levies collected on petroleum products, including KSh5.40 per litre of petrol and diesel and KSh0.40 per litre of kerosene.
However, increased withdrawals to cushion consumers against rising fuel costs have significantly reduced the resources available for future interventions.
At the height of the government’s stabilisation efforts, a subsidy of KSh34.07 per litre of diesel was applied to prevent a much steeper increase in pump prices. The depletion of the fund has now reduced the government’s capacity to continue offering similar support.
Without the latest subsidy intervention, a litre of diesel would have risen to KSh252.86, highlighting the scale of the support previously provided to consumers.
Government Extends VAT Relief
In a separate intervention, the National Assembly approved an extension of the reduced eight per cent Value Added Tax (VAT) rate on petroleum products for another 90 days, instead of allowing the rate to revert to 16 per cent.
However, the tax relief comes at a substantial cost to public revenue. The government had been foregoing approximately KSh9 billion monthly following the reduction in VAT introduced in April 2026.
The latest extension is projected to increase the total revenue forgone to approximately KSh81 billion by the end of the additional three-month period.
Although the reduced VAT rate offers some protection against further price increases, it does not fully offset the effects of rising international oil prices and the withdrawal of direct subsidies.
Cost of Living Concerns Grow
The combination of higher fuel prices and limited subsidy resources raises fresh concerns about the cost of living in Kenya.
Fuel is a major component of the country’s transport and production costs. Any sustained increase can place pressure on household budgets, particularly when businesses adjust the prices of essential commodities to account for higher operating expenses.
The situation also presents a challenge for policymakers, who must balance the need to protect consumers against the pressure to increase government revenue and manage public expenditure.
With the reduced VAT rate currently serving as a temporary cushion, the direction of future pump prices will depend partly on developments in international oil markets, shipping conditions and the government’s ability to respond to further price shocks.
