President William Ruto-backed Government to Government (G2G) deal with Saudi Arabia, which was initiated in April 2023, is facing uncertainty as Kenya expresses its intention to withdraw.

The move comes as the East African nation acknowledges that the arrangement has contributed to the distortion of the forex market, and contrary to expectations, it has failed to alleviate the pressure on the dollar.

In an attempt to stabilize the shilling against the dollar, the G2G deal was launched with three national oil exporters from the Gulf.

The agreement allowed for a six-month credit period for oil imports, supported by letters of credit issued by participating commercial banks.

"As an interim measure to help ease FX pressures, we introduced a new oil import arrangement in April 2023. It replaced the previous open tendering system, under which oil import dues were payable upon five days of delivery, often creating undue FX market pressures," stated the Treasury in an IMF report published on Wednesday.

The report reveals that during the first six months of the arrangement, actual average monthly import volumes fell short of the agreed monthly minimums.

Lower demand from the domestic market and regional re-export markets contributed to this shortfall.

Despite this, the initial agreement was extended for another twelve months until December 2024, with more favourable costing terms.

"The extension of the arrangement reduces the risk of materialization of contingent liabilities due to shortfall in the actual imports. The government intends to exit the oil import arrangement, as we are cognizant of the distortions it has created in the FX market, the accompanying increase in rollover risk of the private sector financing facilities supporting it, and remain committed to private market solutions in the energy market," the Treasury affirmed.

In response to concerns raised by the private sector, the Treasury also pledged to conduct all foreign exchange conversions related to the oil scheme at market rates.

Furthermore, the government plans to amend regulations on the fuel pricing formula to specify the pass-through of the exchange rate risk component and any other risks that may materialize.

This potential decision to withdraw from the G2G deal might indicate Kenya's effort to address challenges posed by the current arrangement and exploration of alternative solutions for the volatile energy sector.