Moment of truth for oil import plan to tame restless shilling

Boda boda operators and Motorist queue to buy petrol at Kakamega National Petrol station on May 3, 2016. [Benjamin Sakwa, Standard] Oil imports under a new State-backed system designed to cut pressure against the dollar have started trickling into the country in what will put to test the new government's plan to tame the restless shilling. The imports started getting in last week, and the fuel will be used in the next pricing cycle by the energy regulator. The government expects the fuel importation deal with three international oil firms to ease the dollar shortage that has crippled the economy for the last year and has worsened in recent months. Speaking at the Port of Mombasa when Kenya received two oil tankers from the Gulf, Deputy President Rigathi Gachagua said the deal would end the strain on the shilling. "We ask all those Kenyans, business people, and investors who have been hoarding US dollars for the purpose of speculation, please offload those dollars to the market today (Thursday) and tomorrow (Friday)," Mr Gachagua said. "With what has happened, freeing $500 million (Sh65 billion) to purchase fuel every month, the demand for the dollar will come down and shilling will gain and we do not want Kenyans to lose their money," he added. "So those who have been hoarding dollars everywhere hoping that it will go up, it will go down," added the DP. Earlier on Tuesday, President Ruto expressed optimism that the dollar exchange rate will soon be below Sh120 from its current rate of Sh134.56 based on the deal. "In the next month or so, you will see the dollar exchange rate coming down in a very phenomenal way. In fact, in my estimation, in the next couple of months, the exchange rate will come below Sh120, maybe Sh115," said Dr Ruto. Kenya selected Saudi Arabia Oil Company (Saudi Aramco), Abu Dhabi National Oil Company (Adnoc) and the Emirates National Oil Company (Enoc) to supply petroleum products on credit for nine months (270 days), with an extended credit period of six months (180 days). Saudi Aramco will supply two cargoes of diesel every month, Adnoc another two cargoes of diesel and one cargo of dual-purpose kerosene, while Enoc will bring in three cargoes of super petrol per month. The firms will nominate local oil marketers that will oversee the importation and collection of money that will then be paid after the expiry of the six-month credit period. The government-to-government agreement is, however, unlikely to bring down fuel prices. This is despite expectations that dealing directly with the oil-producing countries would give Kenya an opportunity to get the fuel at discounted rates. Fuel prices will remain unchanged over the next month, according to new guidelines published by the Energy and Petroleum Regulatory Authority last week. Oil marketers yesterday raised concerns about such issues as the cost that would come with the extended credit period of six months. "The premiums and the actual exchange rate that the consumers will pay for is way more than what the costs are," said a marketer who sought anonymity highlighting the concerns. The government has admitted that the new system may not directly affect lowering pump prices. Cost of living crisis However, it maintains the new deal will stabilise the shilling, whose volatility has triggered a cost-of-living crisis in Kenya's import-dependent economy. During the credit period, in addition to oil marketers paying for products using the shilling as opposed to dollars as has been the case, they are also expected to reduce demand for the US dollar and reduce pressure on the foreign exchange reserves that are at their lowest levels in over a decade. The shilling on Monday hit an all-time low against the dollar, signalling inflation and higher cost of imported goods. The weakening of the shilling has triggered fears of a fresh round of inflationary pressure, which is set to become a political headache for the new government. The depreciating shilling now threatens to pile fresh pressure on fuel prices, which have stoked public anger. Central Bank of Kenya (CBK) data shows Kenya shilling exchanged at an average of Sh134.5676 yesterday, setting up the country for more expensive imports, electricity and debt servicing distress. According to State officials, a key objective of the arrangement is to reduce the demand for the dollar, driven by petroleum imports by extending the time required to source for dollars from five days to 180 days. Demand for dollars during every import cycle has put a strain on the local foreign exchange reserves. This, in turn, tends to weaken the shilling. "The domestic oil marketing companies will no longer have to scramble for dollars in order to evacuate their products from the tanks," said State House's top economic adviser David Ndii. "They will pay the importers in shillings." According to Dr Ndii, who is the chairperson of the President's Council of Economic Advisers, shifting the dollar settlement to oil-importing companies, makes it easier to plan for the purchase of dollars in a manner that does not destabilise the market. The local oil industry requires about $500 million (Sh65 billion) every month to buy approximately 740,000 metric tonnes of fuel. The oil marketing companies previously had to pay the importers in US dollars. Dr Ndii says the rise of a parallel market for foreign exchange had compounded the crisis every time when importers wanted to make oil imports. The exchange rate movements are factored into the fuel pricing formula. "It was ok when there was only one exchange rate. But by late last year, the Central Bank in its wisdom, or lack of it thereof, adopted a foreign exchange management system regime that effectively killed the interbank market," said Dr Ndii. "Consequently, the pump price was based on one exchange rate, while oil marketing companies (OMCs) were buying dollars at other exchange rates in the parallel markets where premiums have risen as much as Sh15 on the official exchange rate." The Energy and Petroleum Ministry has echoed this sentiment, saying the deal is primarily aimed at easing the pressure on the country's foreign exchange reserves and is unlikely in the near term to result in lower pump prices. Cabinet Secretary David Chirchir, however, noted that reducing the spread between the CBK rates and the rates offered by banks and forex bureaus could also lead to lower pump prices. The rate at which oil marketers buy the dollar is seen as a prudently incurred cost and is factored in retail prices to cushion them from losses. In the cycle to March 14, the energy regulator applied a rate of Sh130 to the dollar, which was the average that oil marketers were buying the greenback from commercial banks. This was at a time when the CBK rate was around Sh124. Oil companies The spread has widened in recent weeks, with the dollar going for as much as Sh142 compared to the CBK-published rate of Sh134.56 as of yesterday. "The oil marketing companies will not be looking for the dollars, and this will mean there will be adequate dollars for other sectors and Kenyans as well. The exchange rate will come down from Sh140 currently," said Mr Chirchir when he appeared before the National Assembly Committee on Energy recently. "The US dollar requirements by OMCs currently account for about 30 per cent of Kenya's total US dollar requirements, putting foreign exchange reserves under pressure, causing serious deficiency in availability of US dollars and the rate at which the US dollar is made available. This has resulted in the depreciation of the Kenya shilling." Meanwhile, Dr Ndii defended the deal as oil marketers questioned the manner in which the eventual winners of the bid were picked. "We envisage that the next annual cycle will see intense competition from International Oil Companies (IOCs) that will deliver price benefits," said Dr Ndii. The government opted for government-to-government oil supply contracts after the shilling tumbled through a series of record lows since last year. The winning bidders will supply products for nine months and will be paid every six months. The deal is expected to alleviate the foreign exchange pressure by removing a third of the demand for dollars in the market. The previous system was open to all retailers in Kenya, with the winner supplying the industry's requirements for two months and paying for the cargo in hard currency within five days of delivery. Useable foreign exchange reserves shrank to less than enough to cover four months of imports of all kinds, which is a statutory requirement. "The usable foreign exchange reserves remained adequate at $6,376 million (3.56 months of import cover) as of April 13," said CBK in its weekly bulletin on Friday. "This meets the CBK's statutory requirement to endeavour to maintain at least four months of import cover." MPs had earlier questioned why the National Oil Corporation (Nock) did not have any role to play despite the government initiating the deal. They noted that inasmuch as the Gulf companies insisted on nominating the local OMCs that they would work with, the government should have also demanded that Nock handle a fraction of the products. The plan also faced a hurdle after four petitioners moved to court, arguing that it was against the Constitution and would drive oil industry players out of business. The petitioners also noted that awarding international firms exclusivity in the importation of fuel could put the security of the fuel supply at risk.

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