The International Monetary Fund (IMF) has expressed concerns regarding Kenya's government-to-government oil import arrangement, initiated in April 2023, with Gulf oil producers, including Saudi Aramco, Abu Dhabi National Oil Company, and Dubai's Emirates National Oil Company.

The scheme allows Kenya to import oil on a six-month credit basis, secured by letters of credit (L/Cs) from Kenyan banks. The financial and economic risks posed by the oil import credit scheme, particularly regarding currency exposure, market distortions, and rollover risks concern the IMF. It has therefore recommended a change in government policy.

In response to the fund's recommendations, the Kenyan government has indicated that it will now row back from its close involvement with the Gulf producers and allow the private sector to assume more of the country's oil import risks.

Exposure to currency-related costs

Under Kenya's current arrangements with the Gulf producers, the IMF is apprehensive that the Kenyan government might be exposed to currency-related costs due to fluctuations in exchange rates during the credit period.

Such exposure could lead to financial liabilities for the government, especially if the Kenyan shilling depreciates against the US dollar during the credit term.

Foreign exchange market distortions

The arrangement has reportedly already created distortions in Kenya's foreign exchange market. By deferring payments for oil imports, the scheme may have led to an artificial suppression of immediate demand for foreign currency, potentially causing imbalances in the forex market.

The IMF has also highlighted an increased rollover risk associated with the private sector financing facilities supporting the scheme. This risk arises from the potential challenges in refinancing or rolling over the credit facilities upon maturity, which could strain Kenya's financial system.

L/C initiative rollback

In light of these concerns, the IMF has advised the Kenyan government to reconfigure the import scheme so that all associated risks are borne by the private sector, which would mitigate potential financial liabilities for the government and promote a more stable foreign exchange market.

In response, Kenya's Treasury Cabinet Secretary, Njuguna Ndung'u, has indicated that the government plans to step back from the arrangement, allowing the market to operate independently with deferred L/Cs managed by private entities.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.