Pwani Oil selling local goods in dollars on currency woes

Pwani Oil commercial director Rajul Malde.

Photo credit: Laban Walloga | Nation Media Group

Pwani Oil Products Ltd has taken a radical route in seeking its clients to pay for goods in dollars, citing difficulties accessing enough stock of the US currency to purchase raw materials from abroad.

The manufacturer of Freshfri and Fry Mate cooking oils on Monday confirmed its dollar-based billing, saying its bankers can only provide half of the firm’s foreign currency requirement.

It clarified a May 25 letter to its customers on the need for dollars for local purchases, saying the use of the US currency is optional.

Industrialists through their lobby, Kenya Association of Manufacturers (KAM), have in recent months raised the alarm over the dollar shortage and their struggles to settle obligations to overseas suppliers in a timely manner.

“Yes, this is an option given to my distributors,” Pwani Oil commercial director Rajul Malde said in reference to the dollar billings for local supplies.

This came a day after Pwani Oil temporarily froze part of its operations due to a shortage of raw materials that it blamed on difficulties accessing the greenback to pay suppliers on time.

The manufacturer had in the letter warned that it was short of dollars to pay foreign suppliers and that it risked running out of the key raw materials it uses to make a range of cooking oils and fats as well as soaps.

Pwani Oil, started in 1981, told its distributors to use a rate of Sh121 per dollar at the time, but added that the rate will keep fluctuating.

KAM last week said its members were buying the dollar at more than Sh120 compared to the then central bank’s official exchange rate of 116.81 units, stoking fears of a parallel exchange rate market.

A parallel exchange rate market develops, in such circumstances; and, when the spread between the official and parallel rates is both substantial and sustained, says an International Monetary Fund official (IMF) working paper.

“We are faced with a situation where we may not have raw materials to be able to supply you finished products as per your requirements. We humbly request that we bill you in USD and that you pay us in USD so that we can pay our suppliers and keep our raw materials coming,” Pwani Oil wrote in the letter, asking clients to pay in the US currency.

“We request that your current and future debt be paid using USD currency. We will, of course, facilitate this by providing you with a USD invoice for the goods purchased and will continue to purchase.”

The maker of a range of cooking oil and soap brands like Ushindi and Sawa said on Friday it halted operations at its refinery in Kilifi, citing the dollar shortage and constraints in the global supply chain for crude palm oil.

“We, however, wish to assure our customers, employees, suppliers, partners and other stakeholders that this is a temporary measure and the business remains in operation and our products available in retail outlets,” Mr Malde said in a statement on Monday.

Central Bank of Kenya Governor Patrick Njoroge last Tuesday rubbished concerns that persistent dollar shortages are triggering the emergence of a parallel exchange rate.

Dr Njoroge maintained the foreign exchange market transacts about $2 billion of the US currency every month which he indicated was enough to meet demand from importers and corporates for payments like dividends.

Demand for dollars locally has gone up significantly this year in line with surging imports following the full reopening of the economy, which has unleashed pent-up demand for both consumer and capital goods after a lull tied to Covid-19 disruptions.

“At the moment, based on the inflows from banks, we are only able to source between $500,000 and $1 million a day against a requirement of $2- $2.5 million a day. So we are only getting half of what we need, sometimes even less than half,” Mr Malde said.

“Terms [of suppliers] are normally cash against documents. So when they ship a container out, they will send us a copy of the documents and we need to pay to get those [original] documents to clear the cargo. Now that’s where the challenge is because if there aren’t enough dollars available, how do you pay and get the documents to clear?”

The situation, he said, has been compounded by stiff global competition for crude palm oil that worsened after Indonesia tightened its export rules to prioritise domestic needs.

Indonesia accounts for about a third of the global crude palm oil exports which make up 60 percent of world’s edible vegetable oil shipments — others being soybean, sunflower and rapeseed oil.

That has left Malaysia as the main source of crude palm oil, the main raw material Pwani uses in the manufacturing of most of its products.

A metric tonne of crude palm oil — used in the manufacture of cooking oil, soaps and cosmetics with glycerin— has nearly tripled to $1,980 (Sh231,283) in March 2022 from an average of $700 (Sh81,767) before the pandemic hit in March 2020, according to KAM.

“Of course, there have been other pressures from increases in the price of oil and other products. And that is coming through, but the point is that it can very well be taken care of by the market,” Dr Njoroge said.

“For you, as a customer, you don’t need to know the rules. Just go to the banks and present your information [on] what you are making the payments for, etcetera.”

First published by Business Daily.