How Kenya Oil Deal Is Distorting Currency Market
The Treasury acknowledges that the Government-to-Government (G2G) oil importation arrangement implemented in Kenya in April 2023 to tackle foreign exchange difficulties has, instead, resulted in disruptions in the currency market.
In its communications with the International Monetary Fund (IMF) regarding the initiative, the Treasury also highlighted a heightened rollover risk associated with the program, indicating a desire to agree by December.
The system implemented by President William Ruto’s administration last year was promoted as a solution to the shortage of dollars in the country at that time. Senior government officials assured the public that the exchange rate would quickly stabilize in favor of the Kenyan shilling.
That has not happened.
“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 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 program 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.
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The government acknowledges that a hurdle encountered by the initiative was its inability to fulfill the agreed-upon minimum oil import volumes with the three Gulf-based oil exporters. This resulted in the extension of the program until 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 the extension of the program was done with more favorable costing terms: “The extension of the arrangement reduces the risk of materialization of contingent liabilities due to shortfall in the actual imports,” it says.
Since the deal was introduced in April, there has been a roughly 20 percent depreciation of the shilling, resulting in an exchange rate of 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 materialize,” the government told IMF.
Last year, Energy Cabinet Secretary Davis Chirchir stated that the Ministry of Energy has been transferring expenses linked to currency devaluation, resulting from an extended repayment period to fuel suppliers, directly to consumers who bear the cost at the fuel pump.
How Kenya Oil Deal Is Distorting Currency Market
