Kenya has announced its intention to terminate a government-to-government (G-to-G) oil deal entered into with Saudi Arabia and the UAE, citing concerns over foreign exchange (forex) distortion.
The National Treasury emphasized the heightened risk faced by private sector financiers supporting the facilities and reiterated its commitment to embracing private market solutions within the energy sector.
The International Monetary Fund (IMF) underscored Kenya’s decision to exit the oil import arrangement in its latest country report, acknowledging the distortions in the forex market, increased rollover risk for private sector financing, and the government’s steadfast dedication to private market-based approaches in the energy sector.
During the initial six months of the agreement, actual average monthly import volumes failed to meet the agreed-upon monthly minimums, primarily attributable to reduced demand both within the domestic market and the regional re-exports markets, as stated by the government.
Kenya had entered into the G-to-G fuel deal with Saudi Arabia and the UAE last year to alleviate forex pressure arising from dollar shortages. Under the master framework agreements with Aramco Trading Fujairah FZE, Abu Dhabi National Oil Company Global Trading Ltd, and Emirates National Oil Company (Singapore) Private Ltd, the Ministry of Energy initiated the supply of petroleum products.
In this arrangement, the country, facilitated by appointed local oil marketers, received fuel on credit terms for up to six months from Emirates National Oil, Abu Dhabi National Oil, and Saudi Aramco. Subsequently, the appointed oil marketers sold the fuel in local currency to their counterparts before distributing it to retailers.
The shillings paid by local oil marketers were held in escrow accounts managed by three local banks, with Kenya Commercial Bank leading the process, taking 180 days to accumulate sufficient dollars for payment to Gulf suppliers.
The government originally attributed the adoption of this deal to persistent dollar shortages caused by the Open Tender System (OTS). It asserted that, under the new arrangement, the Kenyan shilling would appreciate against the US dollar to levels ranging between 115 and 120.
However, contrary to expectations, the shilling depreciated by over 20 percent against the US dollar since the commencement of the deal, surpassing the historical low mark of 160 to the dollar. The National Treasury now plans to withdraw from this G-to-G deal by December 2024.
