A vessel offloads fuel at Kipevu Oil terminus within the port of Mombasa in this picture taken on November 13, 2019. The oil import system meant to cure the dollar shortage has hit headwinds.
The oil supply deal Kenya signed with three State-owned Gulf companies last year to tackle challenges related to the scarcity of dollars has failed to ease the foreign exchange pressures on the country as expected, the Treasury has admitted. In disclosures to the International
Monetary Fund (IMF), the Treasury said the government intends to exit the arrangement under which the country imports oil over a credit period in December, citing the distortions it has created in the forex market.
“The government intends to exit the oil import arrangement, as we are cognizant of the distortions it has created in the FX (forex) market, the accompanying increase in rollover risk of the private sector financing facilities supporting it and remain committed to private market solutions in the energy market,” the Treasury is quoted saying in an IMF report published Wednesday.
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The IMF report relates to its Extended Fund Facility (EFF) and Extended Credit Facility (ECF) with Kenya.
The arrangement entered with Saudi Aramco, Abu Dhabi National Oil Company and Emirates National Oil Company in March last year was billed as the solution to the scarcity of US dollars that was prevalent in the country then, with senior government officials, including President William Ruto, promising that exchange rates would soon stabilise in favour of the shilling.
The Treasury notes that the arrangement, popularly referred to as G2G [government-to-government] deal, was introduced “as an interim measure to help ease FX pressures”.
But after months of defending the deal publicly, the government now says it has faced challenges, including failure to meet minimum oil import volumes as agreed with the three Gulf-based oil companies, which caused an extension of the programme to December 2024.
“In the first six months, the actual average monthly import volumes fell short of the monthly minimums agreed under the arrangement. This was due to lower demand from our domestic market as well as from the regional re-exports markets,” the government says.
One of the three Gulf oil majors at the centre of the government-to-government fuel import deal revealed in December how it pushed Kenya to extend the arrangement by one year as a condition for renegotiating prices, underlining the firms’ power of leverage in the multi-billion shilling scheme. The government, however, observes that the extension of the programme was done on “more favourable costing terms.”
“The extension of the arrangement reduces the risk of materialisation of contingent liabilities due to shortfall in the actual imports,” it says.
The arrangement replaced the previous open tender system (OTS) which allowed local oil marketers, subject to winning one-month tender, to import fuel then supply to others for retail distribution across the country.
When introducing the G2G deal, the government blamed the OTS for creating persistent US dollar shortages in the market, propping the new system as an initiative that would provide a solution in the forex market, which was witnessing depreciation of the shilling and scarcity of the dollars.
Since April when the deal was introduced, the shilling has depreciated by about 20 percent to exchange at 160.79 units against the US dollar.
“We commit that all FX conversions done as part of the oil scheme will be done at market rates. We will also amend regulations on the fuel pricing formula to specify pass-through of the exchange rate risk component and any other risks that may materialise,” the government told the IMF.
The Ministry of Energy has been passing over costs relating to currency depreciation as a result of the extended repayment period to the fuel suppliers to consumers, who pay for it at the pump, Energy Cabinet Secretary Davis Chirchir disclosed last year.
