Kenya: Fuel dealers plan to convert Sh45bn subsidy arrears into bonds

Kenya's oil marketers have put forth a proposal to the Treasury to convert fuel subsidy arrears worth billions of shillings into interest-earning instruments like bonds in a bid to alleviate their deteriorating cash flow situation. The move comes as a welcome relief for the dealers who have been grappling with cash flow challenges amid pending bills amounting to around $300 million. In a recent interview with CNBC Africa, Eric Musau, the Executive Director of Research at the Standard Investment Bank, shed light on the implications and potential benefits of this proposal. The initiative aims to address the arrears stemming from a subsidy program under the previous government. Musau highlighted that the scheme presents a win-win scenario for both oil dealers and the government, allowing the latter to lessen its pending bills burden. The government, with approximately $5 billion to $6 billion worth of outstanding bills, is exploring avenues to settle these debts without depleting its cash reserves. Musau emphasized that the proposal could ease the financial strain on fuel retailers and provide a sustainable solution for clearing the subsidy arrears. The Treasury Cabinet Secretary has already initiated modifications to the 2023-2024 budget to accommodate payments to firms, indicating a positive reception to the plan. While the conversion of arrears into bonds offers an attractive return rate of about 14.5% on a three-year bond, it also raises questions about investor interest and the potential impact on the market. The proposal could provide oil marketers with a viable option to monetize their pending bills and enhance their liquidity. However, concerns linger regarding the market dynamics and the possibility of flooding the market with government instruments. Musau mentioned the importance of striking a balance to prevent devaluation of existing instruments. The looming cash flow challenges have pushed some fuel retailers to seek bank loans, underscoring the urgency of addressing the arrears issue. Failure to adequately resolve the pending bills could exacerbate the financial strain on businesses and spill over into the banking sector. Non-performing loans among commercial banks supplying the government have surged, adding to the urgency of mitigating the cash flow challenges faced by retailers. The proposal targets major industry players such as Total, Vivo, and Rubis, reflecting a proportional distribution of the subsidy liabilities among market leaders. As the government explores options to address these legacy liabilities, the proposal to convert arrears into bonds emerges as a promising solution. Looking ahead to the 2023-2024 budget presentations in the East African region, expectations are high for President William Ruto's administration in Kenya. The focus is likely to center on promoting domestic production, creating local jobs, and enhancing revenue collection through innovative tax measures. The government's commitment to self-reliance and efforts to stimulate key sectors like agriculture and electric transportation are set to shape the upcoming budgetary decisions. While infrastructure projects may take a backseat, investments in critical sectors are expected to drive economic growth and sustainability under the new administration.