How Kenya plans to cushion gulf oil deal from shilling slide

Kenya has set up an interest-bearing escrow account into which proceeds from the sale of fuel obtained through a government-to-government transaction are deposited in a bid to protect itself from foreign exchange risk.

This action is a willingness to pay a dollar amount once the credit-based fuel import period under the deal expires on December 31.

The deal, which began as a way to address the shortage of US dollars in the local market, was driven by the huge demand for dollars estimated at about $500 million per month.

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“The escrow account for the shillings carries interest at the 91-day Treasury bill rate minus 2.0 per cent, with the interest being paid into a stabilization fund set up by the government to cover any foreign exchange losses arising from a possible devaluation of the shilling in the period between import and payment in US dollars,” says the IMF in its report following the conclusion of the Fifth Review of the Kenya Programme.

Data from the Central Bank of Kenya (CBK) shows that the shilling has fallen 9.6 percent since Kenya announced the credit-based fuel sources deal with Saudi Aramco, Emirates National Oil Company and Abu Dhabi National Oil Company on March 13.

Central Bank of Kuwait data shows that 91-day Treasury notes attract an annual interest rate of 12.0 percent for investors, which means that deposits made in an escrow account at this point will attract 10.0 percent annually in interest.

The government has indicated in the past that it did not enter into a hedging arrangement as part of the intergovernmental fuel import deal out of confidence that the Central Bank of Kuwait’s efforts to correct challenges in the interbank foreign exchange market would help stem the decline of the shilling.

There are three interventions that occur. One is that the central bank is working to restore the interbank market. Secondly, that the central bank is looking to strengthen its reserves, and the third is that the national government through the national treasury is working to bring additional liquidity to the market and we have a risk management committee that monitors the market so that we do not leave it until the letters of credit are mature. Therefore, hedging is not necessary at this juncture,” Daniel Kipto, director general of the Energy and Petroleum Regulatory Authority (Epra), told the nation on May 24.

The International Monetary Fund also reveals the formation of the Treasury and Risk Management Committee, which includes representatives of the government, local banks and oil marketers to monitor the implementation of the agreement and the terms of purchase of incoming shipments into the country.

“The total amount of liabilities owed to oil marketing companies to fuel exporters will culminate at 6 months of fuel imports, then be carried forward when the first shipment received is settled and a new shipment is received. Based on April 2023 prices, the total liabilities incurred are estimated at approximately $700 million per month for a total of more than $4 billion by the end of September 2023,” says the IMF.

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

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