How Kenya oil deal is distorting currency market

Saturday January 20 2024

Mv Front Cheetah docked at the port of Mombasa, Kenya. PHOTO | NMG


The Government-to-Government (G2G) oil importation arrangement that was introduced in Kenya in April 2023 to address foreign exchange challenges, has had an opposite effect as it created distortions in the currency market, Treasury has admitted.

In disclosures to the International Monetary Fund (IMF) about the initiative, the Treasury also noted that there is an increase in rollover risk in relation to the initiative, expressing intentions to exit the deal in December.

The arrangement, introduced by President William Ruto’s government last year, was billed as one that would address scarcity of dollars, which was acute in the country then, with senior government officials promising that exchange rate would soon stabilise in favour of the Kenyan shilling.

That has not happened.

Read: Kenya shilling to weaken further

“The government intends to exit the oil import arrangement, as we are cognisant 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 government told the IMF, according to its report published Wednesday.


In the IMF report relating to its Extended Fund Facility (EFF) and Extended Credit Facility (ECF) with Kenya, the government notes that the programme was introduced “as an interim measure to help ease FX pressures” but the government is now eating a humble pie and admitting that it failed, after months of defending it publicly.

The government admits that one of the challenges the initiative faced was failure to meet minimum oil import volumes as agreed with the three Gulf-based oil exporters, which caused an extension of the programme to December 2024.

“In the first six months, the 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.

The government, however, observes that extension of the programme was done with more favorable costing terms: “The extension of the arrangement reduces the risk of materialisation of contingent liabilities due to shortfall in the actual imports,” it says.

Read: Kenya pays $238m to gulf companies under G-to-G arrangement

Since April when the deal was introduced, the shilling has depreciated by about 20 percent to exchange at 160.79 units against the 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 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 said last year.