(Nairobi) – Kenya may face significant financial consequences following its failure to meet the minimum import volumes outlined in a government-to-government (G2G) oil deal, according to a recent report by the International Monetary Fund (IMF). The government has now announced its plans to exit the deal, acknowledging that it has not delivered as expected and that it has contributed to distortions in the foreign exchange (FX) market.
Signed in April 2023, the G2G deal temporarily replaced the open tendering system for oil imports, which was blamed for putting pressure on Kenya’s foreign exchange reserves. Under the agreement, oil was to be supplied on credit for six months, with payment backed by letters of credit from participating commercial banks. However, the IMF report indicated that the government is now looking to withdraw from the arrangement, citing its adverse effects on the country’s financial stability.
“The government intends to exit the oil import arrangement, as we are aware of the distortions it has created in the FX market and the increased rollover risk of private sector financing,” the Treasury told the IMF. The report further noted that the G2G deal could worsen Kenya’s debt situation and hinder private sector development. The IMF also highlighted that although many commercial banks were involved in the deal, much of the financing was focused on one large bank, KCB Group, which had guaranteed deals worth KSh 515 billion by November 2023. By mid-2024, three of the original five banks had pulled out of the agreement, signaling the deal’s growing instability.
In addition to the challenges posed by the deal itself, a decline in fuel consumption has further complicated the situation. According to a report from the Energy and Petroleum Regulatory Authority (EPRA), domestic fuel demand in Kenya dropped by 2% between July 2023 and June 2024. The reduction in demand is partly due to high taxes and the rising cost of living, which have made petroleum products less affordable for many Kenyans. This downturn in consumption has had a knock-on effect on the country’s ability to meet the agreed-upon import volumes.
The situation has been further complicated by Uganda’s decision to stop importing fuel from private oil marketers in Kenya. In July 2024, Uganda passed the Petroleum Supply Amendment Act, which gave the Uganda National Oil Company (UNOC) the exclusive mandate to procure and supply petroleum products. This shift was in response to complaints from President Yoweri Museveni about inflated fuel prices in Kenya. Uganda, a landlocked country, imports more than 90% of its fuel from Kenya, but the new law has allowed it to bypass Kenyan intermediaries, thus reducing demand for Kenyan oil imports.
Despite these challenges, economic advisor to the Office of the President, David Ndii, defended the G2G deal, arguing that the government had already accounted for the drop in demand. He explained that a Variation Agreement (VA) had been signed in September 2023 to adjust the remaining import volumes through 2024. “There is no exposure. Once Uganda exited, we extended the term to match the contract quantities. Variation clauses are standard in commercial contracts,” Ndii said in a post on X (formerly Twitter).
Ndii also dismissed concerns about Uganda turning to other sources, such as Dar es Salaam, for its fuel imports. He further indicated that the IMF program for Kenya would come to an end in April 2025, suggesting that the country may soon be free from the program’s constraints.
Former Cabinet Secretary for the Treasury, Njuguna Ndung’u, also defended the deal earlier this year, arguing that it helped alleviate the forex crunch that was threatening to cause an oil shortage. Prior to the G2G arrangement, importers required large sums in foreign currency to maintain supply, which was becoming increasingly difficult due to a weakened Kenyan shilling. According to Ndung’u, the deal had a stabilizing effect on the market by reducing speculation and ensuring a steady supply of fuel without the need for oil marketing companies to scramble for foreign currency.
“Since the start of the G2G arrangement, none of the 136 oil marketing companies have had to go to the market to source for US dollars, which has helped remove market speculation and further stemmed the depreciation of the Kenyan shilling,” Ndung’u explained earlier this year.
Table: Impact of the G2G Oil Deal on Kenya’s Market
| Metric | Details |
|---|---|
| Date of Deal Signed | April 2023 |
| Oil Consumption Decline | 2% drop between July 2023 and June 2024 |
| Key Changes in the Deal | Shift from open tendering to government-to-government deal |
| Kenya’s Financial Exposure | Potential contingent liabilities due to unmet import volumes |
| IMF’s Concerns | Increased risk to foreign exchange market and private sector |
| Impact of Uganda’s Exit | Reduced demand for Kenyan oil imports by Uganda |
| Government’s Counteraction | Variation Agreement signed to adjust volumes |
| Key Participating Bank | KCB Group, which guaranteed KSh 515bn in deals |