A record Sh10 billion fuel subsidy for the pricing period ending July 14, 2026, is expected to intensify cash flow challenges for oil marketers as they continue to await government reimbursements for fuel sold below market rates. According to a senior energy sector official, the subsidy package includes support for kerosene, which is currently subsidised at Sh55.68 per litre.
Diesel accounts for the bulk of the subsidy expenditure due to the government’s unprecedented Sh34.07 per litre subsidy. As Kenya’s most consumed fuel, with daily demand averaging between seven and eight million litres, diesel represents more than 95 per cent of the total subsidy bill.
Industry players warn that the latest subsidy burden comes at a difficult time, as marketers are yet to receive most of the Sh11.2 billion owed from subsidies implemented between April and mid-June. The delayed payments, coupled with high fuel import costs and tax obligations that must be settled before fuel distribution, have strained working capital and pushed some companies out of business.
The subsidy has helped lower diesel prices in Nairobi by Sh10 to Sh222.86 per litre, while kerosene remains at Sh191.38 per litre. Petrol was not subsidised during the current cycle, although its price dropped marginally by Sh0.22 to Sh214.03 per litre.
Oil marketers, particularly smaller local firms, have repeatedly raised concerns that delayed subsidy reimbursements undermine their financial stability, forcing many to seek additional bank financing or temporarily suspend operations. Government officials, however, maintain that previous arrears have largely been addressed and that payments for the last cycle are being processed.
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Since April, the government has relied heavily on fuel subsidies to cushion consumers from soaring global fuel prices and ease the burden of the rising cost of living. The programme is financed through the Petroleum Development Levy, which charges Sh5.40 per litre on diesel and petrol and Sh0.40 per litre on kerosene.
The levy has played a crucial role in shielding consumers from sharp fuel price increases triggered by geopolitical tensions in the Middle East. The conflict involving the United States, Israel and Iran pushed international prices of refined petroleum products sharply higher, with diesel, petrol and kerosene recording increases of up to 73 per cent between February and May.
Data from the Energy and Petroleum Regulatory Authority (EPRA) shows diesel prices rose from $637.76 per tonne in April to $1,108.58 in May, while petrol increased from $686.53 to $1,127.09 per tonne over the same period. Diesel prices had peaked at $1,393.50 per tonne in April before easing following a 60-day ceasefire agreement between the US and Iran, raising hopes of further declines in global fuel costs.
The government’s subsidy fund, which held Sh17 billion at the beginning of April, has been nearly exhausted. This prompted authorities to reduce fuel VAT from 16 per cent to 13 per cent and later to 8 per cent as part of broader efforts to keep pump prices in check.
Without the combination of subsidies and tax reductions, fuel prices in April could have increased by as much as Sh64.92 per litre for diesel and Sh33.37 for petrol. Instead, the increases were limited to Sh40.30 and Sh28.69 respectively.
Major oil distributors have consistently identified delayed subsidy payments as a significant operational challenge. The government previously resorted to issuing a three-year bond in 2023 to settle subsidy arrears that had accumulated to Sh45.8 billion. However, the move was criticised by marketers, who argued they were effectively compelled to accept bond payments based on the amounts owed to them. As subsidy obligations continue to grow, concerns are mounting that similar financing measures may be required again if arrears persist.
