Kenya is shifting away from the government-backed fuel import credit scheme following concerns raised by the International Monetary Fund (IMF) about potential currency-related costs that taxpayers might be exposed to.
The Treasury Cabinet Secretary, Njuguna Ndung’u, announced that the government will step back from the scheme and allow private sector entities, including oil marketing companies, banks, and credit insurance providers, to manage it. The scheme was established in partnership with the governments of the United Arab Emirates and Saudi Arabia to ease foreign exchange pressures by deferring the purchase of fuel in the spot market, thereby postponing the demand for dollars.
The Treasury provides comfort letters to exporters and local banks for fuel purchases from these countries by designated oil importers. While the Treasury argues that these comfort letters are not government guarantees, the IMF expresses concern that the government might be exposed if foreign exchange valuation losses are not passed on to consumers and if there’s a shortage of foreign currencies in the domestic market. The IMF recommends that all risks should be borne by the private sector.
The IMF estimates that the outstanding obligations of oil marketing companies to fuel exporters could reach over $4 billion by the end of September 2023. Despite the concerns raised, the Kenyan government maintains that the scheme has had a positive impact on the foreign exchange market by bringing stability and predictability. In response to the concerns, Kenya is adjusting its approach to the scheme and working on allowing the market to function with reduced government involvement.
This move comes as the shilling continues to weaken against the dollar.