Fuel subsidies: If we must subsidize, subsidize the household not the pump

India followed a parallel logic when it faced a cooking gas subsidy so 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 subsidize?

The logic is simple. If a State must subsidize, then it should subsidize 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 thousands of commuters, and led to deaths and property damage, triggered by an increase in fuel price that pushed diesel up by a total of 46 percent and petrol by 20 percent from their pre-April levels.

Begs the question. What are we actually paying for?

Kenya charges a Petroleum Development Levy (PDL) of KSh 5.40 per litre of Super Petrol and Diesel to raise money that government can use to stabilize fuel prices, and cushion consumers when global oil prices rise. In the financial year to June 2025, it collected Ksh 26.37 billion but only Kshs 13.68 billion was used for price stabilization. While these revenues are legally designated for the Petroleum Development Fund to stabilize pump prices, the National Treasury has frequently reallocated billions to clear general exchequer deficits.

Furthermore, when price stabilization 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 cutting the stabilization factor for Super Petrol to KSh 0.00 while heavily subsidizing 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 stabilization fund to a household stabilization fund.

Kenya’s 2026 Economic Survey places the overall poverty headcount at 39.8%. This translates to approximately 20 million people or 5 million vulnerable households. According to the Institute of Public Finance, these vulnerable houses survive on an absolute expenditure cap of less than Kshs 387 per day (approx. $3). By injecting an extra Kshs 2,000 per month to these households adds Kshs 66.67 per day, bringing their expenditure cap to Kshs 453.67.

While this may sound negligible to the middle and upper class, it represents nearly 17.2% 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 approximately 4 million Kenyans out of absolute daily cash deprivation overnight by a single sustained monthly transfer.

So where would the monthly Kshs 2,000 come from you may ask? By consolidating fragmented, leaky commodity subsidies which include the PDL (Kshs 30 billion), the Equalization Fund (Kshs 16.8 billion), the Strategic Grain Reserve (Kshs 25 billion), the fertilizer and agricultural inputs (Kshs 15 billion), and from the eTIMS compliance windfall (Kshs 33.2 billion). Add those streams together and Ksh 120 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 stabilization 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 Kshs 2000 gives it the liquidity to buy in slightly larger volumes. It also provides them with an insurance buffer so 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 mpesa account active.

It also enables them to pay for SHA.

The macroeconomic multiplier on this money is not theoretical. A Ksh 2,000 transfer to a wealthy household has near-zero velocity. It sits in a bank or mpesa account. The same transfer to a vulnerable household has 100 percent 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 stabilization fund is the threat that is often talked about in whispers and innuendos, the cartels. You see, commodity subsidies are cartel bait. When you subsidize a physical commodity whether fuel, fertilizer or grain, you create a price differential between the subsidized domestic price, and the market price across the border. That differential is called arbitrage. Fuel gets adulterated, fertilizer gets smuggled into neighboring countries, and grain gets diverted from government warehouses to the market.

However, when you subsidize 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 centered 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.