Kenya is expected to settle at least $4 billion close to (Sh600 billion) this week in the government-to-government oil sale deal that started in March.
The agreement is between Kenya, the United Arab Emirates and Saudi Arabia.
Under the deal, three state-owned oil firms from the two countries were to nominate licensed oil companies in Kenya to import fuel for local and transit markets.
The arrangement was meant to give comfort to the oil firms in the source countries about the security of payments.
In the plan, which had an initial duration of nine months to December, the fuel was to be imported on six months' credit, backed by commercial paper issued by local banks and confirmed by their international counterparts.
Kenya has been receiving fuel on credit supplied by Saudi Aramco, Emirates National Oil Company Group (ENOC) of Dubai and the Abu Dhabi National Oil Company (ADNOC).
While Saudi Aramco has been supplying two cargoes each for diesel and super petrol every month ENOC supplied three cargoes of super petrol every month.
"The total amount outstanding obligations of OMCs to fuel exporters will peak at six months of fuel imports and then it will roll over as the first received cargo is settled,'' the agreement reads.
Based on April prices, the total obligation incurred is estimated at around $700 million per month for a total of $4 billion by the end of September.
The move was part of the government’s strategy to ease pressure on Kenya’s foreign reserves, which have for several months stayed below the Central Bank’s statutory requirement of maintaining a minimum of four months’ worth of import cover.
On Friday, the Central Bank of Kenya (CBK) said the usable foreign exchange reserves remained adequate at $7.05 billion (Sh1.02 trillion) or (3.81 months of import cover) below the statutory requirement to endeavour to maintain at least four months of import cover.
In addition to the foreign reserves challenge, fuel marketers had reported inadequate access to US dollars to purchase fuel and access their stocks at the Kenya Pipeline Company (KPC) depots. This caused fuel shortages in several petrol stations across the nation.
It is estimated that oil companies need $500 million to pay for fuel imports every month, with the sector accounting for 28 percent of the import deal.
With payments due this week as per the agreement, oil marketers and money market experts are worried that the initial problem was not resolved but postponed.
Daniel Musila, an FX expert at Triangle Capital says that taking $4 billion out of the market will be tough for Kenya and is likely to hurt both the country's reserves and local currency's stability.
"The government-to-government oil importation plan only postponed the situation. We used to pluck $500 million per month, quite comfortably but taking eight times the amount at ago bleeds trouble,'' Musila told the Star.
He adds that the payment if made, will have a devastating effect on the shilling, which has since climbed over 20 per cent in the past 12 months to close Monday at 146.40.
"That alone has the potential to push the shilling to 150 units against the greenback by the end of this week,'' he said.
Mike Wanyoike, an oil and gas expert echoes his sentiments. He is afraid that the payment will have an overriding effect on October's oil retail prices.
"The payment is coming just days before the country announces new monthly prices. Consumers might not feel the pain this month but I foresee danger starting mid-October,'' he said.
A money markets expert Kate Meli hopes that Kenya has accumulated enough to repay. I can't even imagine the effects that can come with a default. The deal was hurried,'' she said.
The oil importation alone accounts for 28 per cent of Kenya's FX needs every month.
While the deal has secured a steady supply of oil in the country, it has been a blow to small-scale oil marketers, who export the product to neighbouring countries.
Some players have opted to re-route the export market to Tanzania, where prices depend on international terms, denying Kenya the much-needed revenue.
Kenya set up an interest-bearing escrow account into which the proceeds from the sale of fuel sourced through the government-to-government deal are deposited.
It was not clear how much has since been collected in the escrow account by the time of going press. Questions and our calls to the Ministry of Energy, Epra and the National Treasury had not been responded to.