MUGWE: If we must subsidise, fund needy households not the pump and crooks

A vehicle turns back along Thika Superhighway in Nairobi during protests over high fuel prices /LEAH MUKANGAI

Their political class had tried and failed 14 times before. The subsidy had become so embedded that successive governments treated it as untouchable and a sacred entitlement.

What changed was not political courage. It was diagnosis. The World Bank reported that nearly 40 per cent of the fuel subsidies were flowing directly to the richest 10 per cent of Indonesian households, and less than one per cent reached the poorest 10 per cent.

The government had spent decades telling the poor that it was protecting them, while systematically transferring billions to the wealthy. When this data became public, the subsidy lost its moral justification overnight. So it was replaced with direct cash transfers to lower-income households that needed the money most. The result was a 24 per cent drop in poverty.

India followed a parallel logic when it faced a cooking gas subsidy riddled with leakage from ghost beneficiaries and cartel diversions. In 2015, India launched the Direct Benefit Transfer for LPG.

This initiative eliminated the universal commodity subsidy and replaced it with money transferred directly to verified low-income beneficiaries. The leakage collapsed almost immediately. This contributed to lifting 135 million people out of multidimensional poverty.

Kenya should pay close attention.

Our fuel politics has become trapped in the usual binary of either you support pump subsidies because wananchi are suffering, or you oppose them because markets must work.

Both positions contain some truth, however, neither is sufficient. The better question is this: if the state has limited fiscal room, what is the smartest thing to subsidise?

The logic is simple. If a state must subsidise, then it should subsidise its citizens, not commodities. The case for this is both economic and moral. Ideally, however, state interventionism particularly in the form of subsidies is not merely inefficient. It is a profound distortion that inevitably misallocates scarce resources. But that is a topic for another day. 

This week, the Transport Sector Alliance called a nationwide fuel strike that disrupted public transport in major towns, stranded hundreds of thousands of commuters, and led to deaths and property damage, triggered by an increase in fuel prices that pushed diesel up by 46 per cent and petrol by 20 per cent from their pre-April levels.

Begs the question. What are we actually paying for?

Kenya charges a Petroleum Development Levy of Sh5.40 per litre of Super Petrol and diesel to raise money that the government can use to stabilise fuel prices and cushion consumers when global oil prices rise. In the financial year to June 2025, it collected Sh26.37 billion, but only Sh13.68 billion was used for price stabilisation.

While these revenues are legally designated for the Petroleum Development Fund to stabilise pump prices, the National Treasury has frequently reallocated billions to clear general exchequer deficits. Furthermore, when price stabilisation is applied, it does not return value equally or proportionally to every Kenyan.

Because fuel consumption scales dramatically with wealth, a universal pump subsidy is inherently regressive, siphoning the bulk of the financial cushion to affluent, multi-car owners.

This structural asymmetry is worsened by the fact that the Ministry of Energy applies the fund unevenly, frequently eliminating the stabilisation factor for Super Petrol, while heavily subsidising diesel and kerosene to shield commercial transport and low-income households from global market shocks.

In economic-speak, a commodity subsidy suppresses the price signal, which is the information through which markets communicate real costs. When the pump price is kept artificially low, it makes fuel seem cheaper than it really is. This pushes more economic support towards heavy fuel consumers, who are often wealthier households.

Let us, like Indonesia and India, examine what is possible in restructuring from a commodity stabilisation fund to a household stabilisation fund.

Kenya’s 2026 Economic Survey places the overall poverty headcount at 39.8 per cent. This translates to about 20 million people or five million vulnerable households. According to the Institute of Public Finance, these vulnerable households survive on an absolute expenditure cap of less than Sh387 per day.

By injecting an extra Sh2,000 per month to these households, we add Sh66.67 per day, bringing their expenditure cap to Sh453.67.

While this may sound negligible to the middle and upper class, it represents nearly 17.2 per cent increase in daily purchasing power, completely making the difference between a family taking one or two meals a day and guaranteeing the baseline nutrition required.

For a micro-entrepreneur, it represents a substantial digital buffer of data and airtime, keeping them linked to mobile money networks and real-time market prices for weeks on end.

This is what experts often fail to communicate. Purchasing power parity is not an abstract IMF phrase. It is the number of days a household can cook, commute, drink safely, or stay in the market. This would effectively lift about four million Kenyans out of absolute daily cash deprivation overnight by a single sustained monthly transfer.

So where would the monthly Sh2,000 come from you may ask? By consolidating fragmented, leaky commodity subsidies, which include the PDL (Sh30 billion), the Equalization Fund (Sh16.8 billion), the Strategic Grain Reserve (Sh25 billion), the fertiliser and agricultural inputs (Sh15 billion) and from the eTIMS compliance windfall (Sh33.2 billion).

Add those streams together and Sh120 billion annually is fully funded for 20 million people without adding a single new tax, a single new levy and a single new budget line. The money exists. It simply requires economic adulting.

A household stabilisation fund can break the structural trap called the kadogo economy. A household with zero disposable surplus buys daily household commodities in tiny expensive plastic pouches, paying a premium for being poor.

An extra Sh2,000 gives it the liquidity to buy in slightly larger volumes. It also provides households with an insurance buffer so that when a child catches a fever, the family does not have to choose between medicine and food. It keeps the mobile phone charged, and the M-Pesa account active. It also enables them to pay for SHA.

The macroeconomic multiplier on this money is not theoretical. A Sh2,000 transfer to a wealthy household has near-zero velocity. It sits in a bank or M-Pesa account.

The same transfer to a vulnerable household has 100 per cent immediate velocity. Every shilling is spent within 48 hours, flowing directly to the mama mboga, the boda guy, the water vendor and the posho mill, stimulating the domestic market from the bottom up. This subsidy stops being a welfare and becomes a grassroots demand stimulus.

Another benefit of pivoting to a household stabilisation fund is the threat that is often talked about in whispers and innuendos ¾ the cartels. You see, commodity subsidies are cartel bait.

When you subsidise a physical commodity, whether fuel, fertiliser or grain, you create a price differential between the subsidised domestic price and the market price across the border. That differential is called arbitrage. Fuel gets adulterated, fertiliser gets smuggled into neighbouring countries, and grain gets diverted from government warehouses to the market.

However, when you subsidise a household, there is no physical asset for a cartel to intercept because the subsidy arrives as money, fungible, immediately usable, impossible to adulterate or divert across the border.

Indonesia and India did not just lift people out of poverty. They eliminated entire categories of structural leakage that had been consuming public funds for decades. This insight alone should end the debate.

Because the state has spent many years behaving like a night watchman over commodities that are too easy to divert, it is forever policing the warehouse, the border, the tanker, the depot and distributors.

That is an expensive and often losing battle. A household-centred subsidy changes the terrain and enables the state to stop defending price at the pump and start defending dignity at the household.

I concede that cash transfers are not magically incorruptible because registries can be gamed. But those arguments call for better administration, not for continuing with a leaky fragmented model that is already failing both fiscally and distributively.

Finally my unsolicited advice is to the experts. It is obvious that cushioning fuel is not the same thing as cushioning citizens. One protects a commodity. The other protects a home.

If we must spend public money to soften economic pain, then let us subsidise a family trying to cook, commute and stay alive. Not a commodity that cartels can adulterate, smuggle, divert or weaponise. Because a subsidy that can be stolen is not social protection.

The architecture already exists. Kenya has already constructed, at significant cost, the targeting and delivery infrastructure. The enhanced single register, which is a consolidated database of all persons eligible for social protection is there.

The money consolidated from the leaky and fragmented stabilisation and Equalization funds is there. The delivery mechanism using USSD codes is there. The only thing missing is the decision.

The argument that Kenya cannot pivot to household stabilisation fund is not an argument about capacity. It is about political will.

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design ¾  Friedrich Hayek