In March, the government announced that it would start importing diesel, super petrol and jet fuel on credit in a deal meant to ease demand for the dollar and prop up the shilling. This is an import arrangement between the Kenyan government and the governments of the United Arab Emirates and Saudi Arabia. Under this deal, three State-owned oil firms from the two countries will nominate licensed oil companies in Kenya to import fuel for local and transit markets. The government-to-government arrangement is meant to give comfort to the oil firms in the source countries about the security of payments.

Before this deal, it was estimated that oil companies need $500 million to pay for fuel imports every month, with the sector accounting for 28 per cent of the import deal. The government argued that making payments in the seventh month will significantly ease the pressure on the dollar, allowing other traders and importers to access the currency for their bills. The first payment was to be made in September this year when the six-month credit period for the fuel cargoes being imported this month lapsed.

However, the government now wants to renegotiate terms with the UAE and Saudi Arabia. A delegation has already been sent to the UAE to renegotiate terms.

Effect of the deal on the economy

Petroleum dealers in the country claimed the terms of the agreement only allow for fixed premiums, failing to factor in a drop in international fuel prices. Despite a 24% drop in international crude oil prices to $79.55 (KSh 11,113) per barrel in May 2023, a litre of petrol, diesel and kerosene now retail at KSh 195.53, KSh 179.67 and KSh 173.44, respectively.

While the deal has secured a steady supply of oil in the country, it has been a blow to small-scale oil marketers, who export the product to neighbouring countries. Some players have opted to re-route the export market to Tanzania, where prices depend on international terms, denying Kenya the much-needed revenue.

Data from the Central Bank of Kenya (CBK) showed the shilling depreciated to KSh 140.78 per US dollar as of Thursday, July 6, 2023, compared to KSh 137 units reported in May 2023.

What the renegotiation means

As the current deal is yet to ease pressure on the dollar as anticipated, banks that backed the deal are now getting cold feet. KCB, NCBA, Absa, Cooperative Bank and Stanbic Bank had initially committed to pay for the imported oil should the government fail to do so. This renegotiation follows the falling prices of oil internationally.

While to some, the renegotiation may signal a possible reduction of fuel prices in the country, that may not be necessarily true. Consumers are not likely to benefit from this new deal due to the fact that the suppliers will factor in the refinancing costs of the product. It is important to note that pump prices are likely to increase because there will be an additional cost on freight and premium in order to refinance the product.