The International Monetary Fund (IMF) has warned that Kenya may need to compensate Gulf oil companies due to failures in meeting the minimum fuel import volumes outlined in the Government-to-Government (G2G) agreement.
The monetary fund noted that Foreign Exchange (FX) and money market volumes have improved while structural issues remain, and risks related to the G2G oil importation scheme are concentrated in one large bank with sizable government shareholding.
It also noted that imported volumes so far are short of the contracted amounts due to a decline in fuel consumption, both in the domestic and re-export markets.
The shortfall stems from a decrease in domestic fuel demand and Uganda’s recent decision to import fuel directly instead of relying on Kenyan routes.
“Given the contracted volumes, the authorities could face contingent liabilities from a decision by Uganda, an important destination for oil re-exports to source its fuel imports directly,” read the student in part.
IMF Explains Why Kenya May Compensate Gulf Firms in G2G Oil Deal
“The authorities envisage the private sector eventually taking over the entire operation of the scheme but have not committed on the timeline.”
This situation places additional financial pressure on Kenya as it manages the evolving dynamics in regional fuel supply and demand.
However, Senior government Economic Advisor David Ndii has played down the IMF warning.
In response to the IMF report, Ndii said the government introduced an innovative solution to solve a problem that “unimaginative bureaucrats are struggling to understand.”
“We’ve struggled to educate IMF mandarins on this transaction but it’s difficult if you don’t grasp basics of structured finance. There is no exposure,” he said.
“Once Uganda exited, we extended term to match the contract quantities. Variation clauses are standard in commercial contracts.”
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Oil Import Arrangement Signed by Kenya and 3 Gulf Countries
National Treasury stated that the interim measure was introduced to help ease foreign exchange pressures at a time Kenya was struggling with a shortage of forex reserves.
The G2G replaced the previous open tendering system, under which oil import dues were payable upon five days of delivery, often creating undue FX market pressures.
The new arrangement, based on a master framework agreed between Kenya and three oil exporters, provided for six-month credit for oil imports, backed by letters of credit issued by participating commercial banks.
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In 2023, the actual import volumes fell short of the agreed volumes under the arrangement due to lower regional and domestic demand.
On September 1, 2023, a supplemental Variation Agreement (VA) was signed, which extended the period to lift the remaining 2023 volumes until end of 2024.
The extension of the initial agreement by twelve months was with more favorable costing terms and reduces the risk of materialization of contingent liabilities due to a shortfall in the actual imports.
But after months of defending the deal publicly, the government now says it has faced challenges, including failure to meet minimum oil import volumes as agreed with the three Gulf-based oil companies, which caused an extension of the programme to December 2024.
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Treasury Admits Deal With Gulf Oil Firms Failed
The Uganda National Oil Company (UNOC) acquired an import license from Energy Petroleum and Regulatory Authority (EPRA).
UNOC was to import diesel (AGO) and petrol (PMS) only for the Ugandan Market and the first cargo was expected towards end of June 2024.
Kenya was to import one cargo less for PMS and AGO each and the number of cargoes under G2G dropped from 8 to 6 in a month.
Consequently, in August this year, the Treasury disclosed to the IMF that the government plans to exit the arrangement allowing the country to import oil on credit by December, citing distortions it has caused in the forex market.
“The government intends to exit the oil import arrangement, as we are cognizant of the distortions it has created in the FX market, the accompanying increase in rollover risk of the private sector financing facilities supporting it and remain committed to private market solutions in the energy market,” the treasury is quoted saying in IMF report.
“We commit that all FX conversions done as part of the oil scheme will be done at market rates. We will also amend regulations on the fuel pricing formula to specify passthrough of the exchange rate risk component and any other risks that may materialize.”
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