IMF warns Treasury of potential debt crisis from failed G2G oil import scheme

The International Monetary Fund (IMF) has warned Kenya's Treasury that the unsuccessful government-to-government (G2G) oil import initiative could worsen the country's debt challenges and hinder private sector development.

The warning follows a significant drop in imported oil volumes under the Sh210 billion G2G deal, mainly driven by decreased fuel demand in both local and re-export markets.

“Given the contracted volumes, the authorities could face contingent liabilities from a decision by Uganda, an important destination for oil reexports, to source its fuel imports directly,” the IMF stated in a staff report.

The report also highlights that imported volumes so far are below the contracted amounts due to a decline in fuel consumption in both the domestic and re-export markets. While more banks are getting involved in the G2G scheme, the IMF notes that most of the activity is still concentrated within one major bank that has significant government shareholding.

These banks have increased their shares in the banking sector, particularly through higher foreign exchange deposits and holdings of government debt by investing local sales proceeds into treasury bills.

“Under the G2G oil importation scheme, more banks are participating, although activity remains concentrated in one large bank with sizable government shareholding. These banks’ shares in banking sector assets (higher FX deposits abroad) and holdings of government debt (investing local sales proceeds into T-bills) have grown. Imported volumes so far are short of the contracted amounts due to a decline in fuel consumption both in the domestic and re-export markets,” reads the report.

The authorities envision that the private sector will eventually take over the entire operation of the scheme, although no specific timeline has been committed to this transition.

Kenya's debts

As of July, Kenya's debt reached $82 billion (Sh10.55 trillion), with about $8 billion (Sh1.03 trillion) owed to China. Other key creditors include the IMF, the World Bank, the United States, and Saudi Arabia. Currently, more than half of the government's revenue is allocated to servicing this debt.

The G2G oil import scheme was launched in March last year, intended to alleviate dollar shortages and stabilise the fuel supply in Kenya.

The initiative involved major players like Saudi Aramco, Abu Dhabi National Oil Company, and Emirates National Oil Company, which provided six-month credit for oil imports secured by letters of credit from Kenyan banks.

Despite these efforts, import volumes have consistently fallen short due to reduced demand. To address this, a supplemental Variation Agreement (VA) was signed on September 1, 2023, extending the timeframe for lifting the remaining 2023 volumes until the end of 2024 with more favourable cost terms, thereby helping to mitigate potential liabilities.

Earlier this year, the Uganda National Oil Company (UNOC) shifted its import route from Kenya to Tanzania, citing Kenya’s policy change from the Open Tender System (OTS) to G2G as a lengthy process affected by the profit margins of multiple stakeholders.

Kenya’s failure to register UNOC for imports via the Mombasa port complicated matters, prompting Uganda to begin importing fuel directly. Consequently, Kenya has reduced its G2G imports, decreasing diesel and petrol shipments from eight to six per month.