The International Monetary Fund (IMF) has warned Kenya’s Treasury that the failed government-to-government (G2G) oil import scheme may worsen the country’s debt situation and further crowd out the private sector.
The warning follows a shortfall in imported oil volumes under the Sh210 billion G2G oil deal, largely due to declining fuel demand in both domestic 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 cautioned in a staff report.
As of July, Kenya’s debt stood at $82 billion (Sh10.5 trillion), with approximately $8 billion owed to China. Other major creditors include the IMF, the World Bank, United States, and Saudi Arabia.
Over half of Kenya’s government revenue currently goes toward debt repayments. The G2G oil import scheme was intended to alleviate dollar shortages and stabilize the fuel supply in Kenya.
It was launched in March last year with Saudi Aramco, Abu Dhabi National Oil Company, and Emirates National Oil Company, providing six-month credit for oil imports backed by letters of credit from Kenyan banks.
However, import volumes have consistently fallen short due to reduced demand. In response, a supplemental Variation Agreement (VA) was signed on September 1, 2023, extending the period to lift remaining 2023 volumes until the end of 2024 with more favourable cost terms, helping to mitigate potential liabilities. Earlier this year, the Uganda National Oil Company (UNOC) shifted its import route from Kenya to Tanzania.
The move was influenced by Kenya’s policy change from the Open Tender System (OTS) to G2G, which UNOC considered lengthy and impacted by the profit margins of multiple stakeholders.
Additionally, Kenya’s failure to register UNOC for imports via the Mombasa port further complicated the process, prompting Uganda to import fuel directly. Consequently, Kenya reduced its G2G imports, dropping diesel and petrol cargoes from eight to six per month.
