Former Treasury Cabinet Secretary Professor Njuguna Ndung’u on Tuesday explained that the government’s Government-to-Government (G2G) fuel purchase arrangement has played a pivotal role in reducing dollar demand and easing the pressure on the Kenyan Shilling.
The initiative, aimed at stabilising Kenya's foreign exchange market and introduced in April 2023, has been hailed as a crucial intervention during a period of global dollar shortages, leading to a notable impact on the local economy.
According to Professor Ndung'u, the G2G arrangement was strategically developed to address the challenges posed by the global dollar shortage.
"The government created and developed the G-to-G petroleum product purchases, which was very important, especially coming in during the global dollar shortage period, and fuel prices declined," Ndung'u stated.
Ndung’u emphasised that the success of the G2G plan should not only be seen in terms of declining fuel prices but also in its ability to create a new market for foreign exchange, reducing the reliance on commercial banks for dollar purchases by oil-importing companies.
Under the G2G arrangement, Kenya received fuel products on credit for six months, a significant shift from the previous spot transactions that required immediate payment.
This innovative approach was designed to ease the immense pressure on dollar demand for importing petroleum products, which, in 2022, accounted for an average of 26.1% of total imports, up from 18.3% in 2019.
The G2G deal involves selected international oil companies (IoCs) supplying products to a lead oil marketing company (OMC) in Kenya.
The OMC, supported by letters of credit from banks, distributes the fuel to other OMCs while converting Kenya Shillings receipts into US Dollars through an escrow account to facilitate payments to the IoCs.
The former Energy Cabinet Secretary Davis Chirchir reported that the shilling’s month-on-month depreciation rate has notably decreased since the implementation of the G2G arrangement.
Data reveals that the depreciation rate fell from 4.2% in April 2023, when the deal came into force, to 1.4% in June 2023, with the rate further reducing to 0.4% month-to-date.
This stabilization of the shilling is a clear indicator of the success of the G2G strategy in curbing dollar demand and enhancing the country's foreign exchange stability.
However, despite these positive outcomes, Ndung'u noted that the G2G arrangement alone is not enough to fully stabilize the forex market.
"Since we managed G-to-G, there is no oil-importing company that has gone to commercial banks to buy dollars, so the success is not to be seen as declining fuel prices but actually creating a different market for foreign exchange. Depending on foreign exchange buying at the retail level was creating a distortion in the market, so fuel prices declined. However, this was not seen as enough," he remarked.
