Kenya may be forced to pay Gulf oil companies ‘contingent liabilities’ after failing to honour minimum import volumes agreed upon in a government-to-government deal signed last year, the IMF said in its latest staff review.
- The government announced plans to exit the oil import agreement between Kenya and three national oil importers launched in April 2023 after admitting it did not work as they had intended.
- The Government-to-Government (G2G) deal momentarily replaced the open tendering system last year, the latter system being blamed for aggravating forex pressure.
- According to the G2G deal, oil was to be supplied for six months on credit and assurance for payment was backed by letters of credit from participating commercial banks.
“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 told the IMF.
The IMF’s staff report after the institution finalized its 7th and 8th reviews on a new facility for Kenya stated that the government was yet to provide a timeline for the abdication of the deal. The Bretton Woods Institution said the G2G oil deal could worsen the country’s debt situation and stifle private sector development.
The institution also said that although many commercial banks participated in the deal, many activities were focused on one large bank with immense government shareholding. By November 2023, KCB Group had guaranteed deals worth KSh 515bn. In July 2024, three of the five banks in the original March 2023 consortium- NCBA, Absa, and Cooperative Bank- exited the deal.
A Dip in Oil Consumption
A decline in consumption of fuel in both the domestic and re-export markets in the region has complicated the deal’s smooth sail since the previous year. In Kenya, demand for petroleum products dipped by 2% between July last year and June this year, according to an EPRA report. High taxes and levies coupled with contracting payslips have seen fuel retailers sell less, affecting demand for imports.
In July this year, Uganda ceased buying fuel from private oil marketers in Kenya and began importing fuel directly. This was following the assent of the Petroleum Supply Amendment Act of 2023, giving sole mandate to Uganda National Oil Company (UNOC) to directly procure and supply all petroleum products. Late last year, President Yoweri Museveni of Uganda complained about middlemen in Kenya who inflated oil prices by 58%. Uganda, a landlocked country, exports over 90% of its fuel from oil marketing companies in Kenya. In reaction to this ‘unfortunate rip-off’, the country planned to seek autonomy in oil importation by entering more favourable deals further diminishing demand for oil importation in Kenya.
Economic advisor to the Office of the President, David Ndii, has defended the G2G deal rubbishing the IMF’s claim that demand for oil fell short prompting possible compensation. He says that the government signed a Variation Agreement (VA) deal in September last year in order to lift the remaining imported volumes to 2024 after a demand shortfall.
“There is no exposure. Once Uganda exited, we extended the term to match the contract quantities. Variation clauses are standard in commercial contracts,” Ndii said in a post on X (formerly Twitter).
Ndii has also sneered at the prospect of Uganda turning to Dar es Salaam to import its oil. He has also hinted that the IMF programme for Kenya ends in April next year.
Former Cabinet Secretary for Treasury, Njuguna Ndung’u, also defended the deal earlier this year after the media reported the government admitted fault in rolling out the deal. He said before the deal, importers needed half a billion dollars every month to replenish supply. The forex crunch could have led to a massive oil shortage prompting government intervention.
“Since the start of the G2G arrangement, none of 136 oil marketing companies have gone to the market to source for US dollars which have served to remove market speculation thereby further stemming the depreciation of the Kenyan shilling,” Former CS Njuguna said at the start of this year.
