NAIROBI, Kenya, Mar 14 – Oil marketing companies are set to start paying for oil imports in shilling as Kenya transitions to a six-month tendering window.
The system, a departure from the prevailing 1-month settlement system, is part of a government-to-government deal seeking to ease pressure on the local currency currently depreciating in value against the dollar.
Speaking at Kawi House on Monday, Energy and Petroleum Cabinet Secretary Davis Chirchir said the government went into negotiations with different governments leading to the signing of a deal with Saudi Aramco to supply Kenya with two diesel cargos every month for the next six months.
Under the deal set to take effect on April 1, Emirates National Oil Company(ENOC) Dubai is to supply three Petrol Cargos every month for the next six months.
Further, Abu Dhabi National Oil Company (ADNOC) will deliver two cargos of diesel every month for the next six months and Jet Fuel into the country.
“The product will henceforth be paid in Kenya Shillings. We will not be paying on the US Dollar,” Chirchir said.
“This basically will relieve the pressure on the dollar to ensure that these dollars are available for the rest of the industry in manufacturing, food security and other sectors,” he explained.
Chirchir noted that the importation arrangements shall be centrally coordinated by his Ministry.
“The proposed transaction is expected to alleviate the demand for the dollar-driven by petroleum imports by extending time required to source for USD liquidity from the current five days to one hundred and eighty days,” he said.
“This is expected to increase the country’s forex reserves which will help decrease currency speculation, whilst revamping the country’s dormant interbank market. What we are doing as a country is to try and manage the interbank spread and with the challenge of the tightening of the monetary policy, we should be able to bring this under control,” Chirchir elaborated.
Kenya’s forex reserves hit an all-time low on March 10 amid a raging dollar crisis in the market which has seen the shilling hit a low of 129 units to the greenback.
The latest Central Bank of Kenya(CBK) weekly bulletin put the country’s usable foreign exchange reserves at USD 6.56 billion(Sh852.2billion) as of March 9, equivalent to 3.67 months of import cover.
Chirchir stated that this G-to-G transaction is anticipated to result in a long-term reduction in the cost of petroleum products by leveraging on economies of scale that arises from having a longer supply contract.
How the G-to-G arrangement will work
On March 1, the Government of Kenya invited bids from Government owned entities for the supply of petroleum products under a G-to-G arrangement.
Subsequently, bilateral discussions with governments of potential International Oil Companies (IOCs) were commenced.
The process contemplates LC tenors of 180 days and the identified IoC will receive payment in dollars.
The identified IoC will then nominate OMC(s) to import the petroleum products on its behalf.
The nominated OMCs will work with banks to issue an Irrevocable Letter of Credit (LC) to the IoC.
Participants in the OTS will pay the nominated OMC in Kenya shillings for Premium Motor Spirit (Super Petrol) and Automotive Gasoil (Diesel) destined for the local market whilst Jet A-1 and cargo destined for transit will continue to be paid for in USD.
The nominated OMC will source US dollars on or before the lapse of the 180-day credit period to meet the LC requirements.