How Kenya plans to cushion gulf oil deal from shilling slide

Fuel station

Vehicles line up to fuel at a petrol station in Nairobi on July 1, 2023. 

Photo credit: Francis Nderitu | Nation Media Group

Kenya has set up an interest-bearing escrow account into which the proceeds from the sale of fuel sourced through the government-to-government deal are deposited in an effort to cushion itself from foreign exchange risk.

This measure is in preparation for a dollar-based payment to be made once the window for credit-based fuel importation under the deal lapses on December 31.

The deal, initiated as a means to address the shortage of the US dollar in the local market was driven by the heavy demand for the greenback estimated at $500 million monthly.

“The shilling escrow account is interest bearing at the 91-day T-bill rate minus 2.0 percent, with the interest paid into a Stabilization Fund set up by the government to cover any FX-currency losses stemming from the potential for depreciation of the shilling in the period between importation and payment in US$,” the IMF says in its report following the conclusion of the fifth review of Kenya’s programme.

The Central Bank of Kenya’s (CBK) data shows that the shilling has depreciated by 9.6 percent since Kenya announced the credit-based fuel sourcing deal with Saudi Aramco, Emirates National Oil Company and the Abu Dhabi National Oil Company on March 13.

The CBK data shows the 91-day Treasury Bill is attracting an annual interest rate of 12.0 percent for investors, implying deposits made into the escrow account at this point would attract 10.0 percent per annum in interest.

The government has in the past indicated it did not enter into a hedging arrangement as part of the government-to-government fuel importation deal owing to confidence that efforts by the CBK to correct the challenges in the interbank foreign exchange market would help stem the slide by the shilling.

“There are three interventions that are happening. One is that the Central Bank is working to restore the interbank market. Two is that the Central Bank is looking to shore up its reserves and three is that the national government through the National Treasury is working on bringing in additional liquidity into the market and we have a risk management committee monitoring the market so that we don’t leave it until the Letters of Credit mature. A hedge is therefore not necessary at this juncture”, the Energy and Petroleum Regulatory Authority (Epra) Director General, Daniel Kiptoo, told the Nation on May 24.

The IMF further reveals that a Treasury and Risk Management Committee, comprising representatives of the government, local banks, and oil marketers has been put in place to monitor the implementation of the agreement and the terms of purchases of consignments coming into the country.

“The total amount of outstanding obligations of oil marketing companies to fuel exporters will peak at 6 months of fuel imports and will then roll over as the first received cargo is settled and a new one is received. Based on April 2023 prices, the total obligation incurred is estimated at around $700 million per month for a total of over $4 billion by the end of September 2023,” IMF says.

The Fund further says the Office of the Attorney General has indicated that the legal arrangement underlying the government-to-government credit-based arrangement will not yield any build-up in Kenya’s public debt position.

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