In a recent move to safeguard against foreign exchange risks, Kenya has taken measures to set up an interest-bearing escrow account. The account will receive the proceeds from the sale of fuel sourced through a government-to-government deal aimed at addressing the shortage of the US dollar in the local market. The deal, initiated in response to the heavy demand for the Dollar, which was estimated at USD 500 million monthly, is set to conclude on December 31.
Read more: Government Deal to Import Fuel on Credit in Motion
According to a report by the International Monetary Fund (IMF) following the conclusion of the fifth review of Kenya’s program, the newly established shilling escrow account will bear interest at 10 percent per annum. The interest accrued will be directed into a Stabilization Fund created by the government to offset any potential foreign exchange losses due to the potential depreciation of the Kenyan shilling between the period of fuel importation and payment in US dollars.
The decision not to enter into a hedging arrangement as part of the government-to-government fuel importation deal was attributed to the government’s confidence in the efforts made by the Central Bank of Kenya (CBK) to address challenges in the interbank foreign exchange market. The CBK has been actively working on restoring the interbank market and strengthening its reserves. Additionally, the National Treasury has been actively introducing additional liquidity into the market. This approach, coupled with a risk management committee monitoring the market, has led the government to believe that a hedge is not necessary at this juncture.
Read more: Kenyans to have Stable Supply of Oil after the New Import Deal
The IMF report also highlights that the total amount of outstanding obligations of oil marketing companies to fuel exporters is expected to peak at 6 months of fuel imports. Subsequently, it will roll over as the initial cargo is settled and new shipments are received. Based on April 2023 prices, the estimated total obligation incurred is around USD 700 million per month, resulting in a total of over USD 4 billion by the end of September 2023.
Notably, the Office of the Attorney General has confirmed that the legal arrangement underlying the government-to-government credit-based fuel importation deal will not contribute to an increase in Kenya’s public debt position. This escrow account initiative demonstrates Kenya’s proactive approach to mitigating potential foreign exchange risks associated with the fuel importation deal and aims to stabilize the country’s currency value during the payment process in US dollars.
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