How the G2G oil deal is distorting the currency market; Report
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The Ruto Government-to-Government (G2G) oil importation deal has created distortions in the currency market according to a Treasury report.
According to the Treasury, Kenya’s April 2023 introduction of the Government-to-Government (G2G) oil importation deal was intended to address foreign exchange issues, but it really had the opposite effect and caused distortions in the currency market.
The Treasury also disclosed to the International Monetary Fund (IMF) that there is an increased rollover risk associated with the effort, indicating plans to pull out of the agreement in December.
The plan, unveiled by President William Ruto’s administration was touted as a solution to the severe dollar shortage that the nation was experiencing at the time.
Top government officials assured the public that the exchange rate would quickly stabilize in favor of the Kenyan shilling. However, this hasn’t been the case.
“The government intends to exit the oil import arrangement, as we are cognizant of the distortions it has created in the FX (forex) 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 government told the IMF, according to its report published Wednesday.
In the IMF report relating to its Extended Fund Facility (EFF) and Extended Credit Facility (ECF) with Kenya, the government notes that the programme was introduced “as an interim measure to help ease FX pressures” but the government is now eating a humble pie and admitting that it failed, after months of defending it publicly.
The government admits that one of the challenges the G2G oil importation faced was a failure to meet minimum oil import volumes as agreed with the three Gulf-based oil exporters, which caused an extension of the programme to December 2024.
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“In the first six months, the average monthly import volumes fell short of the monthly minimums agreed under the arrangement. This was due to lower demand from our domestic market as well as from the regional re-exports markets,” the government says.
The government, however, observes that the extension of the programme was done with more favorable costing terms: “The extension of the arrangement reduces the risk of materialization of contingent liabilities due to shortfall in the actual imports,” it says.
Since April when the G2G oil deal was introduced, the shilling has depreciated by about 20 percent to exchange at 160.79 units against the dollar.
“We commit that all FX conversions done as part of the oil scheme will be done at market rates. We will also amend regulations on the fuel pricing formula to specify pass-through of the exchange rate risk component and any other risks that may materialize,” the government told IMF.
The Ministry of Energy has been passing over costs relating to currency depreciation as a result of the extended repayment period to the fuel suppliers to consumers, who pay for it at the pump, Energy Cabinet Secretary Davis Chirchir said last year.
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