Home Commodities Dollar-for-oil swaps strain Kenyan shilling

Dollar-for-oil swaps strain Kenyan shilling

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Photo courtesy: The Business Daily
Photo courtesy: The Business Daily

The Kenyan shilling is facing increased pressure as a substantial amount of dollar-denominated loans taken by oil marketers from banks last year come due. Despite a government-supported fuel importation deal aimed at easing dollar demand, oil dealers are repaying these loans amid foreign exchange shortages, leading to continued high demand for dollars within the oil industry and undermining the benefits of the fuel importation agreement.

In these transactions, known as currency swaps, oil marketers exchanged Kenyan shillings for equivalent amounts of dollars with local lenders. They essentially loaned each other money, agreeing to repay the amounts at a specified date and exchange rate. At the end of the agreement, they would swap again at either the original exchange rate or another pre-agreed rate, thereby closing the deal.

A top bank executive noted, “The oil dealers have swaps that need to be settled. Remember they took lots of them last year because of the availability hitches. We see that a significant amount is being used to pay these swaps.”

To combat a shortage of dollars that was impacting their ability to pay for fuel imports, oil companies increased their foreign exchange borrowings and currency swaps last year. While the government-backed fuel importation deal with the United Arab Emirates and Saudi Arabia has facilitated access to dollars, the Kenyan shilling has continued to depreciate against the dollar, albeit at a slower rate. It closed at 146.7 units against the dollar, compared to 135.33 units in April.

Oil marketers turned to cross-currency swaps as a safeguard against future depreciation against the dollar, especially as the country faced a shortage of the greenback, which jeopardized its ability to pay for imports.

While state officials remain optimistic about the impact of the deal, the shilling’s decline against the dollar has made imports more expensive. The government signed the deal with the UAE and Saudi Arabia governments for fuel supply on a 180-day credit period, set to expire in December.

The state will decide whether to extend the deal from January next year, but opinions differ on whether it has achieved its intended impact. Oil firms have benefited the most from the deal, but other importers argue that more needs to be done to stabilize the shilling’s value.”