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Kenya Set to Retreat from the Fuel Import Scheme with Gulf Nations

Patricia Mutua by Patricia Mutua
August 22, 2023
in News
Reading Time: 2 mins read

Kenya is poised to withdraw from its engagement in the fuel import credit scheme negotiated with Gulf nations, a move prompted by the International Monetary Fund’s (IMF) concerns about potential currency-related costs for taxpayers. Njuguna Ndung’u, the Treasury Cabinet Secretary, has announced that the government will hand over the scheme’s management to private sector entities like oil marketing companies (OMCs), banks, and credit insurance providers.

Ndung’u clarified that the government had engaged with IMF staff to explain that the scheme, designed as a trade finance arrangement, does not pose risks to the Kenyan government. Despite this explanation, the government has decided to allow the market to function independently and shift away from its active participation in the scheme.

The fuel import credit initiative, established in collaboration with the United Arab Emirates and Saudi Arabia, aimed to reduce forex pressures by postponing the need for dollars to purchase fuel, a significant import commodity for Kenya. However, the IMF expressed concerns that the government could face budgetary implications if forex valuation losses weren’t passed on to consumers.

The IMF suggested that the private sector should bear all associated risks after the initial rollout. It highlighted that the government’s exposure could lead to budgetary calls and recommended changes in the mechanism for setting fuel prices to align with budgeted resources.

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Kenya will soon make its first payment under the scheme for the April consignment. While the government claims it is not incurring costs, it is putting safeguards in place to ensure market functionality. Despite the scheme’s operation, the Kenyan shilling remains weak against the dollar. Ndungu asserted that the arrangement has contributed to stability and predictability in the foreign exchange market, noting a shift away from using spot rates.

In response to foreign exchange risks, Kenya established an interest-bearing escrow account where proceeds from fuel sales via the scheme are deposited. Ndung’u further expressed willingness to work with the IMF to ensure the market’s smooth operation while maintaining a sense of stability in the foreign exchange market.

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