Gov’t set to exit G-to-G oil deal
The Kenyan Government is set to exit the government-to-government (G-to-G) oil deal over instability of the shilling.
In a report by the International Monetary Fund (IMF) the government is quoted admitting that it has been unable to cure the free fall of the Kenyan shilling against foreign currency.
"The G2G oil import scheme continues to evolve but potential risks, including FX market segmentation, remain," IMF stated.
The scheme, which was initially for 9 months, has been extended for another 12 months to December 2024, including negotiating some favourable costing terms.
IMF notes that by mid-November 2023, oil imports under the scheme amounted to about US$3.7 billion
and letters of credit worth over US$784 million were settled.
"Actual monthly average import volumes fell short of the monthly minimums agreed under the G2G scheme, owing to lower demand from Kenyan domestic and regional markets. Staff continues to monitor the risks associated with this scheme, including potential segmentation of the FX market and implications for banks’ FX risks, and disorderly exit from the scheme in the absence of an exit strategy," IMF added.
G-to-G oil import scheme
Initially, the government intended to use the deal to cure the deterioration of the shilling against foreign currencies, including the US dollar.
"The government intends to exit the oil import arrangement, as we are cognizant of the distortions it has created in the FX market, the accompanying increase in rollover risk of the private sector financing facilities supporting it and remain committed to private market solutions in the energy market," IMF quoted the Kenyan Treasury.
Initially, the programme was to be executed through three companies; Gulf Energy, Galana Oil Kenya Ltd, and Oryx Energies Kenya Limited.
IMF reveals that while a large share of the increase between March and September 2023 could be accounted for by escrow deposits under the G-to-G oil import scheme, expectations of continued depreciation of the shilling amid persistent FX shortages, and FX market dysfunction, as well as the narrowing interest differential between some types of the shilling and US$ deposits likely have contributed to the increase in FX deposits.
"Risks from the G-to-G oil imports scheme and contingent liabilities should be managed carefully. Future risks from Public Private Partnership projects should be contained through integration into the budgetary process and inclusion of a limit on their total stock," IMF adds.
