Kenya’s shilling fell to another record low on Tuesday as huge dollar demand by oil importers continued to weigh heavily on the local currency.
According to data from the Central Bank of Kenya (CBK), the shilling exchanged at an average of 147.6412 against the dollar.
However, a check by The Standard revealed retail dollar buyers paid up to Sh155 per unit in banking halls as the demand for the greenback continues to surge. The weakening of the local currency signals inflation and higher costs of imported goods.
It also sets up the country for a higher cost of electricity and debt servicing distress. Kenya in March this year entered into a deal with Saudi Aramco, Emirates National Oil Co (Enoc) and Abu Dhabi National Oil Co (Adnoc) for the supply of fuel on credit, as it sought to reverse the weakening of the shilling against the dollar.
President William Ruto had in April said the fuel importation deal would strengthen the shilling and trading at below Sh120 to the US dollar in just a few months.
“From this month of April, all our fuel marketers and other players in that space will be able to buy fuel products in Kenya shillings. This will remove pressure on the dollars. In fact, in the next one month or so, we will see the exchange coming down in a very phenomenal way. In fact, in my estimation… in the next couple of months, the exchange rate will come down to below Sh120, maybe Sh115, you never know,” said Ruto.
Yesterday, the National Treasury defended the government-to-government oil deal saying it has eased pressure on the dollar. “The G-to-G arrangement has eliminated spot purchases for the USD by about 100 oil marketing companies which previously created speculative pressure in the spot market.”
“The G-to-G does not therefore in any way expose the country to exchange rate volatility or depreciation, but rather protects the economy from such negative effects.”
Treasury added the deal also bore other pricing benefits.
“The government has been able to leverage on the economies of scale resulting from the G-to-G arrangement to renegotiate for a reduction in the Premium and Freight at a time when the Premiums and Freights for the rest of the world are on a steep upward trend driven by the recent production cuts by OPEC, the ongoing Russia-Ukraine conflict and the approaching winter in the Northern Hemisphere,” it said.
Letters of credit
According to Treasury Letters of Credit (LCs) amounting to $238 million (Sh35 billion) have been settled under the deal.
“It is worthwhile noting that these LCs, with a combined value of USD 238,842,710.12, have already been settled (prepaid before maturity) without distorting the forex market,” said Treasury.
Under the deal, Treasury says, payment for the entire import of Jet A1/Dual Purpose Kerosene and the transit portion of Super Petrol and Diesel imports under the G-to-G arrangement is made in USD and such amounts credited to an escrow account.
“The Kenya shillings that paid for the local portion of super petrol and diesel imports are credited to a separate escrow account and subsequently converted into USD as each individual LC maturity date nears,” says Treasury.
“Currently, the USD escrow account holds USD 1 billion while the Kenya shillings escrow account holds Sh115 billion which will ensure timely and seamless payment of all maturing LCs.”
The government has since extended the deal with Middle Eastern state owned oil firms for importation of petroleum products on credit by one year to December next year.
Manufacturers earlier complained that a shortage of the greenback was forcing them to buy it at a premium compared to the CBK’s official average exchange rate, a situation they warned earlier could disrupt their manufacturing activities and subsequent product shortages if this is not addressed.
Several large banks are now selling the dollar at between Sh151 and Sh155 per unit, while buying the same at between Sh143 and Sh148, with bankers and forex bureaus saying the higher prices have been driven by demand and the cost of accessing the hard currency on their part.
Standard Chartered Bank Kenya and Equity Bank quoted the greenback at Sh153.6 and Sh152 per unit respectively yesterday, according to a spot check by The Standard.
Stanbic Bank, on the other hand, was selling the US currency at Sh153.5 per unit. Family Bank was selling at Sh151 per unit while I&M sold at Sh154.
Gulf oil companies
Under the Ruto government oil deal, the Gulf oil companies would supply products to nominated local oil marketers that then sell the petroleum to other oil marketing companies, which pay in local currency as opposed to the previous scenario where they would buy in dollars.
The firms nominated to sell the fuel locally would then over a six-month period buy dollars and remit them to the Gulf companies in the sixth month.
This way, the deal was expected to ease demand on the dollar and slow down deterioration of the shilling. Previously, local oil marketers would pay $500 million every month to buy the fuel to the importing oil marketer, usually the firm that won the bid to import through the Open Tender System (OTS).
The system, which is run by the industry but under supervision by the ministry, has been suspended as the state implements the G-to-G deal.
Epra earlier said the oil marketers nominated to handle the products and payments have adequate dollars to make the payments.
The fuel importation deal was aimed at slowing down the weakening of the shilling. Six months down the line, the shilling continues to weaken. This could be taken to mean the deal has not worked.
Government officials however said earlier it has worked and that the shilling would be at a worse position possibly upwards of Sh170 were it not for the fuel import deal.
Epra said the deal has helped slow down the depreciation of the local currency, noting that before the G-to-G deal, it was depreciating three per cent on average every month but this has slowed down to one per cent.
“The G-to-G arrangement has eased pressure on the Kenya shilling with a reduction in depreciation against the USD from a high of three per cent per month to one per cent".