Davis Chirchir, the Energy and Petroleum Cabinet Secretary, stated that the government has entered into a fuel importation deal with three international oil firms on a government-to-government basis. This deal aims to alleviate the dollar shortage that has been negatively impacting the economy for the past year.
Chirchir highlighted that petroleum products constitute about 35 percent of the total Forex requirements. Under this deal, the oil firms will nominate local oil marketers who will oversee the importation and collection of money. Payments will be made after a credit period of six months.
Additionally, the extended credit period, coupled with the use of the local currency instead of dollars for product payments, is expected to reduce the demand for US dollars and alleviate pressure on the foreign exchange reserves, which have reached their lowest levels in over a decade.
The objective of this arrangement is to decrease the demand for US dollars resulting from petroleum imports by extending the time needed to acquire dollars from five days to 180 days. Chirchir explained that importers usually receive payments within a short period of time, specifically five days each month when petroleum cargoes arrive in Mombasa. This puts a strain on the local foreign exchange reserves and significantly increases the demand for dollars, consequently weakening the shilling.
The Cabinet Secretary emphasized that the credit period is relieving pressure on the shilling and ensuring the availability of dollars for the wider market. He further stated that the unavailability of dollars has been a major challenge exacerbated by the devaluation and depreciation of the Kenyan shilling.
Chirchir made these remarks during the commissioning of a new bottom loading system at the Kenya Pipeline Company depot in Nakuru. He pointed out that the tightening of US government monetary policy due to post-Covid-19 inflation, which reached a record high of 9 percent, contributed to the dollar shortage.
Kenya has selected Saudi Aramco, Abu Dhabi National Oil Company (Adnoc), and Emirates National Oil Company (Enoc) to supply petroleum products on credit for a period of nine months (270 days), with an extended credit period of six months (180 days). The supplies include diesel, dual-purpose kerosene, and super petrol.
Before the government-to-government fuel importation deal, companies that imported products for their production, such as oil marketers and manufacturers, had to purchase dollars at a premium to the Central Bank of Kenya’s official average exchange rate. This led to a widening gap between the official rate and the market rate offered by banks and foreign exchange bureaus.
Chirchir, accompanied by Nakuru Governor Susan Kihika, expressed that the government has made significant progress in stabilizing the rapid depreciation of the shilling caused by the tightening of US foreign Forex policy. He emphasized that direct dealings with oil-producing countries would enable Kenya to obtain fuel at discounted prices.
He reassured fuel companies that they would now be able to pay for their fuel in Kenyan shillings, eliminating the need to search for dollars every month. The government has taken the necessary steps to ease the burden on those who seek returns in dollars.
The local oil industry requires approximately $500 million (Sh64 billion) per month to purchase around 740,000 metric tonnes of petroleum products, and the oil marketing companies have been required to pay importers in US dollars.
The dollar shortage has been attributed to various factors, including declining exports, high import bills, and reduced remittances.
Foreign exchange reserves are primarily utilized for government payments such as servicing external debts and acquiring essential government imports, including pharmaceuticals.
The Central Bank of Kenya holds foreign currency reserves, predominantly in US dollars, as a financial safety net. These reserves also serve as backup funds in unlikely emergencies, such as shilling devaluation, thus instilling confidence in investments.
Paying in the local currency will be a significant advantage for oil marketers who have been negatively impacted by having to pay higher Forex rates than those factored into the price caps.
It will also ensure the security of fuel supply, avoiding situations where some oil marketers were unable to find dollars to pay importers, resulting in shortages in some of their retail outlets.
The Cabinet Secretary revealed that the newly commissioned bottom loading system was manufactured by local engineers. This system will reduce long queues of trucks at the storage facility by pumping 1400 cubic liters of fuel per minute into a fuel tanker.
“This is the first of the proposed 15 systems we intend to set up. We aim to gradually replace the top loading system, where staff members climb on top of the tanker, exposing them to the risk of fire and hazardous fumes. We will continue investing in safer and more efficient technologies,” disclosed Chirchir.