The tragic news from Nairobi this morning confirms the grim cost of market interference. Four protesters were killed as demonstrations against rising fuel prices turned violent. The Kenyan government, like many others, has attempted to control petrol costs through subsidies and price caps. The result? A predictable mess of shortages, black markets, and now, bloodshed.
Let’s be clear: fuel prices are a function of global supply and demand. When governments try to bend this reality, they only store up trouble. Kenya’s strategy of capping retail prices while the global crude market surges creates an unsustainable gap. The subsidy bill blows a hole in the budget, inflation ticks higher, and investors take note. Capital flight, anyone? The shilling weakens, imports cost more, and the cycle repeats.
Contrast this with British energy policy. I do not praise the current government lightly, but on fuel duty stability, they have acted with rare fiscal sense. The five pence cut to fuel duty introduced in March 2022 has been maintained, not extended. A modest, targeted measure that avoids the distortion of sweeping subsidies. More importantly, Britain’s reliance on market pricing means that when oil prices spike, demand adjusts. Consumers grumble, but they adapt. The result? No queues at the pumps, no riots.
The critics will say Britain’s approach is heartless. But which is more heartless: a temporary price spike that encourages conservation and investment in alternatives, or a permanent subsidy that drains the exchequer and eventually leaves the poorest unable to afford fuel at any price? The Kenyan tragedy shows the latter path ends in despair.
Central bank policy also matters. The Bank of England’s commitment to inflation targeting, however flawed, has anchored expectations. Kenya’s central bank, by contrast, has kept rates low to accommodate fiscal profligacy. Inflation is running at nearly 8%. The shilling has lost 15% against the dollar this year. Investors are fleeing to hard currencies. The result is a perfect storm: fuel priced in dollars becomes more expensive, the subsidy cost soars, and the government can neither fund the subsidy nor allow prices to rise freely.
The lesson is clear: market efficiency is not a luxury, it is a necessity. Governments that let prices adjust will face short-term pain, but they avoid the long-term rot. Britain’s model, for all its imperfections, has kept the lights on and the cars running. Kenya would do well to study it, before more lives are lost.
For now, the markets will watch and wait. Gilt yields hold steady, but the risk premium on Kenyan debt is rising. The bottom line: fiscal irresponsibility always ends in tears. And sometimes, in blood.
