Khali brew is a quest item in the Fight Arena quest. Once the player has spoken to the Kazard Guard in the south-eastern room of the jail, it is possible to buy the beer for 5 coins from the Khazard barman in the bar in the south-west corner of the Fight Arena. The Khazard barman suggests lying down before drinking it so there is less distance to collapse, however there is no option for the player to drink it. Give it to the Kazard guard to get him drunk and steal the Khazard cell keys.
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It looks identical to a bottle of Gin.