Kenya stares at worsened effects of a currency crisis as a $4 billion (Sh567 billion) fuel import bill under the government’s scheme that hoped to ease pressure against the shilling matures in September, amid the country’s volatile dollar reserves.
The country in March this year issued its first oil import tender under a new system designed to cut pressure on the foreign exchange rate by switching to 180-day credit from settlement on delivery.
President William Ruto’s government opted for the government-to-government oil supply contracts after the shilling tumbled through a series of record lows.
The International Monetary Fund (IMF) now estimates the accumulating bill under the plan will cross the half-trillion shillings mark by the end of September this year when the dollar-denominated payment will be due.
“The total amount of outstanding obligations of OMCs (oil marketing companies) to fuel exporters will peak at six months of fuel imports and will then roll over as the first received cargo is settled and a new one is received (if the scheme is extended past the initial nine-month period),” notes the IMF.
“Based on April 2023 prices, the total obligation incurred is estimated at around $700 million (Sh99.2 billion) per month for a total of over $4 billion by the end of September 2023.”
The plan amounted to postponing the demand for foreign exchange according to some critics.
The IMF has cautioned that under the scheme the government is exposed to calls on the national budget in case prices at the pump are not adjusted to fully pass through any foreign exchange valuation losses to final consumers and to provide access to dollars to cover any potential shortage of foreign exchange in the domestic market.
“The authorities committed that the exchange rate used for FX transactions under this scheme would be consistent with the program’s continuous conditionality on multiple currency practice,” noted the IMF.
After the initial rollout period, IMF staff have consequently advised that the import scheme should be reconfigured so that all risks are borne by the private sector.
“Risks associated with the new oil import scheme should be limited by adjusting its setup after the initial rollout period so that all risks are borne by the private sector,” said the IMF.
“Similarly, to reduce risks to the budget, changes in the mechanism for setting pump prices should ensure that fuel price decisions are always aligned with budgeted resources.”
The fuel import bill payment will come at a time when Kenya’s foreign exchange reserves are faced with pressure amid a raging dollar crisis.
The pool of critical reserves however rose to Sh1.117 trillion in the week ending July 20, after Kenya secured a fresh financial bailout from the IMF, the Central Bank of Kenya (CBK) weekly statistical supplement showed on Friday.
Foreign exchange reserves are largely tapped for government payments such as servicing external debts and essential government imports such as oil and medicines.
The shilling’s exchange rate has continued to depreciate sharply against the US currency despite the deal that was hoped to ease pressure on the currency.
“The Kenya Shilling remained relatively stable against major international and regional currencies during the week ending July 20. It exchanged at Sh141.70 per US dollar on July 20, compared to Sh141.29 per US dollar on July 13,” said the regulator.
The country’s forex markets have been marred by a mismatch between dollar demand and supply, with importers saying they are paying a higher rate of up to Sh150 compared to official exchange rates published by CBK.
The previous fuel import system was open to all fuel retailers or oil marketers in Kenya, with the winner supplying the industry for two months and paying for the cargo in hard currency within five days of delivery.
Under the new scheme, the National Treasury provides comfort letters to exporters and local banks for fuel purchases from Saudi Arabia and the United Arab Emirates by designated oil importers.