The Deal: When Kenya struck a deal with two Gulf firms in March 2023 for the supply of petroleum products, the government was confident that this move would alleviate the demand for dollars and ease pressure on the Kenyan shilling.
According to the agreement, signed between the Kenyan government and Saudi Aramco, Emirates National Oil Corporation (Enoc) and Abu Dhabi National Oil Corporation Global Trading (Adnoc), the government is expected to raise and remit approximately $4 billion (Ksh573.3 billion) for the six months, more than half of Kenya's three-month import cover next month.
Kenyan officials argued that it was a calculated decision to acquire petroleum products on a six-month credit period, aiming to eliminate the need for importers to expend hundreds of millions of dollars each month. The deal was fuelled by the dollar pressure, which saw the exchange rate spike from just 123 to the greenback.
The numbers: A month later, President William Ruto hailed this move as a masterstroke, exuding confidence that the faltering exchange rate of the Kenyan Shilling - then at Ksh134 to the Dollar - would record a turnaround, and tick down below the Ksh120 mark.
However, fast forward to the present, the initial anticipation of the Kenyan shilling's appreciation seems like a mere pipe dream.
The shilling continues to weaken against the dollar, reaching Ksh144 on August 8, in stark contrast to its starting average of 123.42 at the beginning of the year. Commercial banks are selling the greenback at between 146 to 150.
Bureaucrat vs. critics: There is no indication that the Kenyan shilling would strengthen against the dollar soon, a situation that vindicates economic experts who had questioned whether this strategy would indeed achieve its intended purpose much to the chagrin of government officials.
“The suppliers were willing to bring down the premiums to allow us to get competitive. We were fairly successful in pushing for the reduction of the freight and premium and we will see improvement going forward,” Energy Cabinet Secretary Davis Chirchir told the Parliamentary Energy Committee in July.
Notably, Kenya is exempt from paying a confirmation charge on the letters of credit to Saudi Aramco, Enoc, and Adnoc. This charge, which is calculated at a rate of 0.7 per cent of the product, has significantly amplified the financial load of the deal on the government.
Speaking to Kenyans.co.ke, Economist, Professor X.N. Iraki pointed out that the agreement has effectively allowed the State to defer the substantial demand for the American currency.
"While the government managed to secure a deal that would ensure that petroleum products were paid for after six months, you will realise that there will be similar demand for the same Dollar. In fact, the demand will be higher since the government will have to look for some $4 billion dollars to remit to foreign nations at once," Professor Iraki explained.
The Professor of Economics explained that, during the period Kenya was not paying for the imported oil, the Kenyan economy and the shilling, weakened further.
"This means that Kenya will even end up paying more after the lapse of the six-month moratorium period. It is true that one US Dollar was trading at Ksh134 at the time when the deal was signed. Almost six months later, the same Dollar is trading at Ksh144. It means that the government will spend more money buying Dollars which will be in higher demand," the Economist explained.
Why it matters: The weakening of the shilling against the dollar will likely see the cost of basic commodities go higher at a time when many Kenyans are already complaining about the high cost of living.
A higher exchange rate means that importers in Kenya will pay more for raw materials which will see the increased cost of production passed on to the consumer.
Electricity consumers will have to pay more due to forex charge which is factored in power bills.
Kenyan imports petroleum products, chemicals, fertiliser, machinery, wheat, rice, and computers among other things that could register price increases with a weaker shilling.
