13 December 2022 By Dorah Msengeti

What is a Subsidy?

A subsidy is a sum of money given by a government to a public or private entity in order to make certain services or products more affordable for the public. The subsidy, therefore, serves to cushion the public from adverse economic conditions.

An illustration is the recent ‘Unga subsidy’ where the Kenyan Government was covering part of the cost for every packet of maize flour to retail at KES 100.

There are different types of subsidies that aim to achieve varied objectives.

Production Subsidies revive or keep certain industries such as agriculture from going under as implemented in Kenya by the ‘Fertilizer Subsidy’. Consumption Subsidies increase the ease of access to amenities and services such as Water, Food, Education, Healthcare, and the ‘Fuel Subsidy’.


What laws regulate it?

Kenya does not have sufficient legal and institutional frameworks that regulate subsidies. This leaves Kenya exposed to economic abuse. The Trade Remedies Act (2017) contains provisions on subsidies but only pertaining to imports and exports.

The government relies heavily on international regulations by virtue of Article 2 of the Constitution of Kenya which states that the general rules of international law shall form part of the laws of Kenya and any treaty or convention ratified by Kenya shall form part of the law of Kenya under the Constitution.

The International regulations include the Agreement on Subsidies and Countervailing Measures (ASCM), General Agreement on Tarif and Trade (GATT), COMESA Regulation on Trade Remedies, and the European Union Regulation on Protection against Subsidized Imports Regulation.

The World Trade Organization (WTO) sets out the objective of the ASCM to be disciplining the use of subsidies and regulates how member countries like Kenya counter the negative effects of subsidies although this focuses on subsidies as relates between countries with respect to ‘free and fair trade between member states.

Kenya is also bound to the provisions of the East African Management Act and Regulations, and the East African Community Customs Union Regulation provisions on subsidies.

The relevant international laws and regulations are meant to protect all countries from the adverse effects of subsidies when carrying out trade activities between the member countries. However, this does not seem to extend to international bodies such as the International Monetary Fund which agreed to loan $2.3 Billion to Kenya on condition that Kenyan Government withdraws the fuel subsidy.

The lack of proper legal and institutional frameworks leaves loopholes that culminate in the exploitation of various stakeholders. The Kenyan Government stopped the Unga Subsidy in August 2022 after claims that it was draining the coffers. There are no definitive guidelines on how government should handle and wind up such subsidies while safeguarding the interests of all parties involved. This left the millers shortchanged with a debt amounting to KES 1 billion. The millers are stranded due to there being no clear guidelines on how they should seek recourse.


Why have the Kenyan and Nigerian Presidents scrapped it?

Despite the advantages of subsidies, the main one being easing the economic burden on citizens, subsidies can have negative effects on a country’s economy.

The Kenyan President once said that food and fuel subsidies are “costly and ineffective” and that “On fuel subsidy alone, taxpayers have spent a total of $1.2 billion since 2020”. This amount would have doubled had the subsidies been extended to June 2023. Additionally, the Kenyan Treasury is poised to save an estimated KES 9.4 Billion from the partial withdrawal of the fuel subsidy. In Nigeria, a country that produces crude oil and imports refined products, it would cost Trillions (Naira) to retain the petrol subsidy in 2023.

Evidently, subsidies create a paradox where in trying to make life easier and more affordable for citizens, governments run the risk of stretching their financial budget too thin. This defeats the purpose as the government will now turn to the same citizens to recover the money mainly through tax hikes.

It is now a question of whether subsidies are unsustainable because of lacking legal and institutional frameworks, or a lack of proper financial planning by the government.

Kenya needs to fix the regulatory loopholes concerning subsidies in order to effect successful economic interventions on behalf and for the benefit of its citizens.

This article was published in the Kenyan Wallstreet on 15 October 2022 and can be accessed here.

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