Kenya revises Gulf fuel import scheme following key concerns raised by IMF

Kenya is making a strategic shift in its approach to the government-backed fuel import credit scheme after the International Monetary Fund (IMF) raised concerns over potential taxpayer exposure to currency-related costs.

Treasury Cabinet Secretary Njuguna Ndung’u has announced that the government will step back from its involvement in the scheme and allow private sector entities, including oil marketing companies (OMCs), banks, and credit insurance providers, to take the reins.

The scheme, a collaborative effort between the Kenyan government, the United Arab Emirates, and Saudi Arabia, was devised to alleviate forex pressures by deferring the purchase of fuel – the country’s largest import – from the spot market.

This postponement of the demand for dollars was estimated to be around $500 million per month. Under this arrangement, the Treasury issued comfort letters to exporters and local banks to assure fuel purchases from the two Gulf nations by designated oil importers.

While the government maintained that these comfort letters did not constitute government guarantees of private debt, the IMF raised concerns about potential foreign exchange (FX) valuation losses that might not be transferred to consumers.

The IMF recommended that the scheme be reconfigured to shift all risks onto the private sector, a view endorsed by the Kenyan government.

In response, Prof Ndung’u affirmed, “After the initial rollout period, staff advised that the import scheme should be reconfigured so that all risks are borne by the private sector.”

The IMF also suggested alterations to the mechanism for setting fuel prices to align them with budgeted resources.

As of mid-September, Kenya will begin making its first payment for the April fuel consignment.

Prof Ndung’u acknowledged that the country had garnered valuable insights from the scheme's operation.

According to the IMF, the outstanding obligations of oil marketing companies to fuel exporters are expected to peak at six months of fuel imports before gradually rolling over as transactions are settled.

Despite these changes, Prof Ndung’u asserted that the government’s role was focused on creating safeguards for the market rather than incurring costs.

"Government comes in to de-risk any form of activity, but because we wanted to make sure that we were dealing with the governments themselves, this is why a G-to-G [government-to-government] was a preferred mode," Ndung'u explained.

The Treasury Secretary noted that the scheme had effectively stabilized the foreign exchange market and increased predictability in the forex rates.

He also pointed out that the arrangement had prompted a reduced need for OMCs to rush for dollars each month.

In a bid to mitigate forex risks, Kenya established an interest-bearing escrow account where proceeds from fuel sales under the scheme are deposited.

Despite the adjustments, the Kenyan shilling continues to weaken against the dollar, trading at 144.18 by the close of business on Friday.