Treasury warns shilling may weaken to Sh180 if State fuel deal is scrapped

Treasury has warned that Kenya’s shilling could weaken to about Sh180 against the US dollar if the government-to-government fuel import deal is scrapped, as political pressure over the arrangement continues to grow. The Treasury says the system has helped stabilise fuel supply and ease pressure on foreign exchange demand.

Treasury Cabinet Secretary John Mbadi issued the warning on Saturday, May 23, 2026, during a Sabbath service at Raliew Central SDA Church in Rarieda attended by ODM Brigade members. He defended the fuel import framework, saying it remains key in cushioning the economy from global shocks affecting fuel prices and currency stability.

Mbadi said fuel prices are largely driven by international market forces, including supply levels, transport routes and dollar demand, rather than local policy decisions alone.

“The prices come up automatically. When demand is high and supply is low, prices rise automatically,” he said. “Fuel into Kenya has to be costly because demand is high and supply is low.”

He added that global logistics challenges have pushed up costs, especially landing costs, due to longer shipping routes and disruptions in supply chains.

“The landing costs and the routes that the fuel products are taking are longer. Therefore, the prices are high. The prices have increased with not less than 80 per cent in landing costs,” Mbadi said.

To cushion consumers, Mbadi said the government has continued to intervene through subsidies and tax adjustments despite rising fiscal pressure.

“In the first month, we spent Sh6.2 billion to subsidise fuel products. In May, we spent Sh5 billion, and another Sh2.7 billion has been added. We have also reduced VAT on fuel to 8 per cent from 16 per cent,” he said.

He noted that while these measures have helped reduce pump prices, they also affect government revenue and public spending.

Mbadi defended the government-to-government fuel import arrangement, saying it ensures steady supply and shields the country from sudden global disruptions.

“This is not a local issue. We are responding as a government under extreme and extraordinary circumstances, like a COVID period,” he said.

He warned that scrapping the system would increase demand for US dollars in the open market, putting further pressure on the shilling.

“If you do not have a reliable supplier you have a contract with, you cannot guarantee fuel supply. You may end up with a country dry,” he said. “If you liberalise fuel importation, the demand for dollars will be high, and that will strain the shilling.”

Mbadi added that the currency could slide sharply under such pressure, pushing up fuel prices across the economy.

“You will find the shilling moving from 129 or 130 to 160, even 180. And once the shilling weakens, fuel becomes more expensive than what we see today,” Mbadi warned.

The remarks come amid growing political opposition to the fuel import model, with critics questioning its transparency and structure.

Opposition leaders including Rigathi Gachagua, Kalonzo Musyoka, Fred Matiang’i and Eugene Wamalwa have called for its removal, arguing that it distorts the fuel market and concentrates benefits among a few players.

Mbadi rejected the criticism, saying the arrangement was introduced to secure fuel supply and protect Kenya from unpredictable global shocks.

“When we reduce taxes, it affects service delivery. We must be honest about that,” he said.

He urged caution in the ongoing debate, warning that fuel policy decisions carry wider economic consequences beyond politics.

“We are doing what is necessary to protect Kenyans from suffering under these global conditions,” he said.