The Kenyan Government is planning to withdraw from the government-to-government (G-to-G) oil deal due to concerns about the instability of the Kenyan shilling.

According to a report by the International Monetary Fund (IMF), the government has acknowledged that it has been unable to address the decline of the Kenyan shilling against foreign currencies.

“The G2G oil import scheme continues to evolve but potential risks, including FX market segmentation, remain,” IMF stated

The G2G oil import scheme, which was initially set for 9 months, has been extended for an additional 12 months until December 2024.

However, the IMF has highlighted potential risks, such as market segmentation in the foreign exchange (FX) market.

The government intends to exit the oil import arrangement in order to address the distortions it has caused in the FX market and to promote private market solutions in the energy sector.

According to the International Monetary Fund (IMF), the increase in foreign exchange (FX) deposits between March and September 2023 can be attributed to various factors.

“Actual monthly average import volumes fell short of the monthly minimums agreed under the G2G scheme, owing to lower demand from Kenyan domestic and regional markets.

Staff continues to monitor the risks associated with this scheme, including potential segmentation of the FX market and implications for banks’ FX risks, and disorderly exit from the scheme in the absence of an exit strategy,” IMF added.

While a significant portion of the increase is due to escrow deposits under the G-to-G oil import scheme, other factors such as the depreciation of the shilling, persistent FX shortages, and dysfunction in the FX market have also played a role.

Additionally, the narrowing interest differential between certain types of the shilling and US dollar deposits has likely contributed to the rise in FX deposits.

The IMF emphasizes the need for careful management of risks associated with the G-to-G oil imports scheme and contingent liabilities.

“The government intends to exit the oil import arrangement, as we are cognizant of the distortions it has created in the FX market, the accompanying increase in rollover risk of the private sector financing facilities supporting it and remain committed to private market solutions in the energy market,” IMF quoted the Kenyan Treasury.

Furthermore, they recommend containing future risks from Public Private Partnership projects by integrating them into the budgetary process and imposing a limit on their total stock.

“Risks from the G-to-G oil imports scheme and contingent liabilities should be managed carefully. Future risks from Public Private Partnership projects should be contained through integration into the budgetary process and inclusion of a limit on their total stock,” IMF adds.