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Gov't to change fuel pricing regulations after G2G oil import deal flopped

Kenya is set to abandon the government-to-government (G2G) oil import arrangement introduced in April 2023.

A collage of President William Ruto and Treasury CS Njuguna Ndung'u

Kenya entered into the G2G deal with gulf oil companies (Saudi Aramco and Abu Dhabi National Oil Company) to address foreign exchange (FX) pressures and mitigate the associated risks.

However, months after President Ruto's administration praised the deal and extended its timelines, the National Treasury revealed to the IMF that the government plans to exit the deal.

Under the G2G oil import scheme, three Kenyan Oil Marketing Companies (OMCs) take ownership of oil cargo upon delivery at Mombasa port.

Approximately 62 percent of the imported oil is sold domestically, while the remaining 38 percent is re-exported to regional countries.

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The interim measure was introduced to replace the previous open tendering system, which often created undue demand for dollars.

The new arrangement, established through a master framework with three national oil exporters from the Gulf, provides a six-month credit for oil imports backed by letters of credit from commercial banks.

Despite an extension of the scheme to December 2024, the actual average monthly import volumes fell short of the agreed minimums in the first six months.

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Lower demand in both the domestic and regional re-exports markets contributed to this shortfall.

The news desk earlier reported that according to data from the Energy and Petroleum Regulatory Authority (EPRA), Kenya recorded a dip in fuel import demand after the increase of VAT from 8% to 16%.

In Treasury CS Prof Njuguna Ndung'u's letter to IMF, he acknowledged the distortions created in the forex market and the increased rollover risk in private sector financing facilities supporting the G2G deal.

He expressed the government's commitment to private market solutions in the energy sector.

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The exit from the oil import arrangement is intended to mitigate these distortions, and the Treasury assured that all forex conversions within the scheme would be conducted at market rates.

Moreover, the government plans to amend regulations on the fuel pricing formula to specify the passthrough of the exchange rate risk component and address any other risks that may materialize.

The IMF acknowledged how the G2G oil import scheme had evolved, but highlighted potential risks, including forex market segmentation.

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By mid-November 2023, oil imports under the scheme amounted to approximately $3.7 billion (Sh598 billion), and letters of credit worth of over $784 million (Sh126 billion) were settled.

IMF also noted that the actual monthly average import volumes fell short of the agreed minimums, primarily due to reduced demand in both domestic and regional markets.

IMF staff shall continue to monitor risks associated with the scheme, emphasizing concerns about forex market segmentation and the implications for banks' forex risks.

A disorderly exit from the scheme in the absence of a clear exit strategy remains a significant concern for the IMF.

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In response, the IMF stressed the importance of managing risks from the G2G oil import scheme and contingent liabilities carefully.

They recommended containing future risks from Public-Private Partnership projects through integration into the budgetary process and setting a limit on their total stock.

The IMF also expressed readiness to provide technical assistance (TA) in this regard.

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The issuance of letters of credit for the G2G oil import scheme has led to a significant increase in off-balance sheet borrowing and lending by the banks involved, raising further concerns about financial stability.

As Kenya prepares to exit the G2G oil import arrangement, attention will be on the government's implementation of alternative strategies to ensure a smooth transition and address the identified risks in the energy sector.

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