Gulf Fuel Import Scheme: Kenyan Gov't To Step Back From Oil On Credit Deal, What It Means

• Treasury Cabinet Secretary (CS) Njuguna Ndung'u announced plans to pull back from the government-to-government fuel import on credit deal
• The International Monetary Fund (IMF) raised an alarm that the deal could expose public funds through government guarantees
• Economists and financial analysts argued that the fuel import credit deal is against the market prices for petroleum products since it was sealed at a particular rate

Kenyan is considering withdrawing from the government-to-government oil import deal signed in April 2023.

Treasury Cabinet Secretary Njuguna Ndung'u confirmed the government's intentions to allow the private sector to take full control of the scheme.

Why IMF wants government out of oil import deal

In an exclusive interview with TUKO.co.ke, Petroleum Outlets Association of Kenya (POAK) chair Martin Chomba confirmed that the International Monetary Fund (IMF) directives were based on the free market economic principles.

This dictates that the government must always pull back from controlling market forces or interfering with happenings in the market to allow for free capitalism to take place.

"The government has been offering comfort letters to suppliers in a bit to let them have confidence that it will facilitate payments of the products. That has come out as an exposure by the government to the public because it does not own any money other than public funds.

"Therefore, the letters could be misinterpreted as guarantees... the stepping back was the Treasury's doing to let the deferred payments be taken care of wholesomely by oil marketing companies and suppliers from UAE and Saudia," said Chomba.

The deal signed between the Kenyan government and oil-producing companies in Saudi Arabia, and UAE was estimated at $700 million (KSh 72.4 billion) per month, amounting to $4 billion (KSh 578.8 billion) by the close of the first window in September 2023.

Why government is paving way for private players

This obligation is supposed to be settled by oil marketers together with the banks offering Letters of Credit (LC) every month.

"The beauty of it is that the amount is not paid at a go. The bank has had enough time (six months) to coalesce dollars and have it ready for payments," he said.

The IMF advised the Kenyan government to restructure the deal so that all risks were left to the private sector parties.

According to FX Pesa Market analyst Rufas Kamau, the IMF raised concerns that the Kenyan government had issued letters of credit in the deal that exposed Kenyans to potential forex volatility risks.

"Treasury responded by saying it had issued letters of comfort in the deal, which are basically solvency opinions about the oil marketing companies, credit insurance providers, and commercial banks involved in the oil deal.

If the private sector is able to uphold the deal and continue making payments after every six months, there will be no added pressure on the shilling. Else, the oil marketing companies will be on the streets monthly, hunting for scarce dollars and hurting the exchange rate," said Kamau in an exclusive interview with TUKO.co.ke.

Has oil deal achieved its purpose?

President William Ruto's administration raised hopes that the fuel import credit deal would stabilise the falling shilling against the dollar.

Ruto said the deal would see the shilling trade at KSh 120 per US dollar.

However, according to the Central Bank of Kenya (CBK), the shilling has since depreciated to KSh 144 per dollar.

Economist Abraham Rugo argued that the government has been in a fix since the deal locked prices, denying consumers a drop in international fuel prices.

"The government entered into an agreement of 270 days (nine months) but with a credit facility of six months. What happens, at that particular point, you lock the price. Since then, the price of fuel has gone down to around $85 per barrel. But then you still have to operate from the price that you locked," said Rugo, while speaking to Citizen TV.

This prompted a renegotiation that saw the state send a delegation to the Gulf nations to look into the deal.

"The Kenya shilling performance against the dollar has gone up, raising the price because the base rate is the dollar. This is what happens when things are not working your way. On September 10, we need to pay the amount that we owe," he added.