Kenya: World Bank warns on slow trickle down of cheaper oil price

Kenya tea production

Kenya tea production

06 March 2015, Nairobi – Kenya’s economy could expand by six per cent this year, the World Bank has forecast, but sluggish transmission of lower oil prices locally could reduce anticipated growth to 5.6 per cent.

In its Kenya Economic Update released yesterday, the lender revised the country’s growth outlook from an earlier projection of 4.7 per cent, saying cheaper oil imports, electricity costs and infrastructure projects will spur growth.

The World Bank argues that as a major oil importer, Kenya’s economy will get a boost from the decreased global prices through first- and second-round effects. First-round effects are those affecting goods and services directly linked to fuel use such as transport and electricity to make or provide.

The Energy Regulatory Commission reviews the maximum fuel prices every mid-month, but has lately attracted criticism over the slow pace it has lowered pump prices compared to the global oil price slump.

“The price transmission mechanism has not been fully implemented even if we consider the time lag for oil imports. ERC should reduce that gap of international crude price drop and domestic prices,” said John Randa, senior economist at World Bank Kenya.

The bank’s economic report states that “taking the lag effects of price transmission to the domestic economy into account, prices should have fallen by 39 per cent” by the last review.

Randa said that though reductions are not expected to be exactly the same as internationally, the current local fuel prices still do not reflect the true market conditions, adding that the ERC “is holding back”.

A litre of super petrol is retailing at Sh84.71 in Nairobi, Sh8.17 less from the previous month, while diesel is priced at Sh75.52 per litre. Kerosene, mostly used for lighting and cooking in poor households, is capped at Sh52.40, having been slashed by Sh13.19 in the February 14 ERC review.

The next price review is slated for Saturday next week, with reductions expected for several consecutive announcements to reflect the lag time.

According to the World Bank, the price of unleaded petrol in Kenya between September 2014 and February fell by an average 18 per cent per litre, while diesel had been slashed by 19 per cent despite global crude oil prices plunging by 48 per cent over the same period.

Between August 2014 and January, local oil prices dipped by 29 per cent cumulatively. Global oil prices had dropped from above $115 a barrel in June last year to a six-year low of below $46 per barrel by late January – a retreat of 60 per cent.

ERC has always defended its pricing mechanism by arguing that local fuel costs factor in insurance, transport and tax charges besides the international oil prices, hence why the reductions do not exactly match the global margins.

However, Randa said the explanation is weak since most of the costs cited are constant or have not had major movements for months.

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