Nairobi, Kenya – Government of Kenya plans to cease the importation of oil on credit agreements with oil firms from Gulf nations over distortions it caused in the foreign exchange market.
According to the National Treasury, the move has been arrived at following the failure to meet the main objectives of the government-to-government (G2G) oil import deal with the three international oil companies.
Why is Kenya backing out of G2G oil deal?
Njuguna Ndung’u, the National Treasury Cabinet Secretary (CS) admitted in a disclosure to the International Monetary Fund that the deal has exacerbated challenges in the petroleum and related sectors.
“The government intends to exit the oil import agreement, as we are cognisant of the distortion 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’s statement read in part.
CS Njuguna lamented the lowest level of oil import volumes as per concurrence, saying the three Gulf companies did not bow to the agreement.
“In the first six months, the average monthly import volumes fell short of the monthly minimums agreed under the agreement,” the report continued.
Kenya signed the oil import credit deal with Saudi Aramco, Abu Dhabi National Oil Company and Emirates National Oil Company in April 2023.
The deal was aimed at easing pressure on the shilling by reducing the number of oil markers struggling for the US dollar in the market.
What Treasury plans to stabilise shilling against US dollar
Njuguna highlighted the need for revision of the oil pricing method to include some particular facts in the foreign exchange rate risks so that it eases the developing pressure on the shilling.
“We commit that all FX conversations done as part of the oil scheme will be done at the market rates. We will also amend regulations on the fuel pricing formula to specify passthrough of the exchange rate risk component and any other risks that may materialize.”
Market analyst at FXPesa Kenya Rufas Kamau told News 9 Kenya that the shilling risks falling deeper, should the fed reserve maintain higher rates.
“If the US reverts to lower rates and quantitative easing, the Shilling could stabilise. but that can mean otherwise considering this is the US election year,” said Kamau.
Is Kenya’s rise of CBK rates helping the shilling?
Kamau noted that despite CBK increasing the lending rates by 200 bps in December 2023, the shilling has continued to lose against the dollar and other major currencies.
Kenya National Bureau of Statistics (KNBS) report in quarter 3 of 2023 showed the shilling lost 30.3% against the Euro, 29.7% against the British Sterling Pound, 20.6% against the USD, and 15.3% against the Japanese Yen.
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