Fuel importation deal will stem dollar shortage, not pump prices

The local oil industry requires about $500 million (Sh64 billion) every month to buy approximately 740,000 metric tonnes. [Boniface Okendo, Standard]

The government expects the fuel importation deal it has entered into with three international oil firms to ease the dollar shortage that has been crippling the economy for the last one year. The shortage has worsened in recent months.

The government-to-government agreement is, however, unlikely to bring down fuel prices. This is despite expectations that dealing directly with the oil-producing countries would give Kenya an opportunity to get the fuel at discounted rates.

The dollar shortage that the government hopes to deal with has seen companies importing products for their operations, including oil marketers and manufacturers forced to buy the dollar at a premium to the Central Bank of Kenya's official average exchange rate.

This has seen the spread between the US dollar's printed rate by the CBK and the market rate for customers quoted by banks and foreign exchange bureaus widen.

The Energy and Petroleum Ministry said the scheme with the Gulf States will, to an extent, cure some of the dollar-related problems.

This is even as MPs raised concerns about the cost implications of acquiring fuel on credit and the cost attached to it that might sustain the high prices.

Kenya has selected Saudi Arabia Oil Company (Saudi Aramco), Abu Dhabi National Oil Company (Adnoc) and the Emirates National Oil Company (Enoc) to supply petroleum products on credit for nine months (270 days), with an extended credit period of six months (180 days).

Saudi Aramco will supply two cargoes of diesel every month, Adnoc another two cargoes of diesel and one cargo of dual-purpose kerosene, while Enoc will bring in three cargoes of super petrol per month.

The firms will nominate local oil marketers that will oversee the importation and collection of money that will then be paid after the expiry of six-month credit period.

The credit period, in addition to oil marketers paying for products using the shilling as opposed to dollars as has been the case, are expected to reduce demand for the US dollar and reduce pressure on the foreign exchange reserves that are at their lowest levels in over a decade.

The local oil industry requires about $500 million (Sh64 billion) every month to buy approximately 740,000 metric tonnes. The oil marketing companies have to pay the importers in US dollars.

Cabinet Secretary Davis Chirchir said this amount is usually paid over a short period of time, which he put at five days every month when the petroleum cargoes arrive in Mombasa.

This, he noted, puts a strain on the local foreign exchange reserves. It also has the effect of significantly increasing demand for the dollar, which in turn tends to weaken the shilling.

He explained that a key objective of the arrangement is to reduce the demand for the US dollar driven by petroleum imports by extending the time required to source for dollars from five days to 180 days.

"The OMCs will not be looking for the dollars and this will mean that there will be adequate dollars for other sectors and Kenyans as well. The exchange rate will come down from the Sh140 currently," said Chirchir yesterday when he appeared before the National Assembly Committee on Energy.

"The US dollar requirements by OMCs currently account for about 30 per cent of Kenya's total US dollar requirements, putting foreign exchange reserves under pressure, causing serious deficiency in availability of US dollars and the rate at which the US dollar is made available. This has resulted in the depreciation of the Kenya shilling."

The deal is primarily aimed at easing the pressure on the country's foreign exchange reserves, according to the ministry, and is unlikely to result in lower pump prices. Chirchir, however, noted that reducing the spread between the CBK rates and the rates offered by banks and forex bureaus could also lead to lower pump prices.

The rate at which oil marketers buy the dollar is seen as a prudently incurred cost and is factored in retail prices to cushion them from losses. In the cycle to March 14, Epra applied a rate of Sh130 to the dollar, which was the average that oil marketers were buying the greenback from commercial banks. This was at a time when CBK rate was at around Sh124.

The spread has widened in recent weeks with the dollar going for as much as Sh142 compared to the CBK published rate of Sh128.

Chirchir added that local oil marketers would be paying for their products in shillings while the local firms nominated by the three Gulf oil companies would over time buy dollars and remit them at the end of the credit period. Payment for cargo delivered in April will be due in October and every month after that.

Paying in local currency will be a major win for the oil marketers who have been taking the hit whenever they have to pay a higher forex rate than what has been factored in the price caps. It will also ensure the security of fuel supply, avoiding scenarios witnessed last week whereby some oil marketers could not find dollars to pay importers and in turn could not access their products to the extent that they started experiencing shortages in some of their retail outlets.

The government-to-government plan is also likely to hurt some oil marketing companies that have been active in Open Tender System (OTS). Under OTS, oil firms consolidate their requirements for importation as one cargo. The companies then place bids to import this fuel and the lowest bidder gets the job.

The MPs, however, raised concerns about such issues as the cost that would come with the extended credit period of six months.

"It is highly likely that the petroleum products will be more expensive as we will be holding other people's money and they will be charging us for that," noted the committee chairman, Vincent Musau, adding that the government could also be postponing a problem that might recur in the coming months when the credit period lapses.

The members also wondered why the National Oil Corporation (Nock) did not have any role to play despite the government having initiated the deal. They noted that in as much as the Gulf companies insisted on nominating the local OMCs that they would work with, the government should have also made requirements that a fraction of the products be handled by Nock.

The plan also faces a hurdle after four petitioners moved to court last week, arguing that it was against the Constitution and would drive oil industry players out of business.

The petitioners also noted that awarding international firms exclusivity in the importation of fuel could put the security of fuel supply at risk.

Raging dollar crisis

Other than oil marketers, manufacturers have also recently complained that a shortage of the dollar was forcing them to buy it at a premium compared to the CBK's official average exchange rate. This, they warned, warned could disrupt their manufacturing activities and subsequent product shortages if it is not addressed.

Kenya's foreign exchange reserves have dropped by Sh51 billion in the last month, falling to their lowest level in over a decade last Friday amid the raging dollar crisis.

The pool of critical reserves fell for the latest straight week in a row to Sh844.3 billion in the week ending March 9, the CBK weekly statistical supplement showed on Friday.

Foreign exchange reserves are largely tapped for government payments such as servicing external debts and essential government imports such as medicines.

The CBK keeps the foreign currency reserves such as dollars, euros, Japanese yen and other currencies as a financial safety net.

The reserves, the bulk of which are in US dollars, also serve as backup funds in unlikely emergencies such as the devaluation of the shilling, thus giving confidence to investors.