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Nairobi City /JACK OWUOR
Kenya's economy is expected to slow further this year as the ripple effects of the Middle East conflict weigh on businesses, households and government finances, World Bank has warned.
This is in addition to rising fuel prices and persistent fiscal pressures.
In its latest Kenya Economic Update, the lender projects the economy will expand by 4.3 per cent in 2026, down from 4.6 per cent recorded in 2025, marking a downgrade of about 0.6 percentage points from its earlier forecast before the escalation of geopolitical tensions in the Middle East.
The report says higher global oil prices, rising transport costs, expensive imports and weaker remittance inflows have combined to dampen Kenya's growth prospects despite improvements in macroeconomic stability over the past year.
"Economic growth moderated slightly in 2025 despite easing inflation, accommodative monetary policy and recovering private sector credit," the World Bank says, noting that a severe drought in late 2025 and the external oil shock have weakened momentum.
The lender notes that before the Middle East conflict intensified, Kenya had made significant progress in stabilising the economy, with inflation remaining largely within the Central Bank's target range.
The monetary policy rate falling from 11.25 per cent in January 2025 to 8.75 per cent in February 2026, helped revive private sector lending.
However, the renewed global energy crisis has quickly reversed some of those gains.
Fuel prices surged sharply between March and April, with diesel prices rising by nearly 18 per cent and petrol by more than 10 per cent, pushing transport inflation close to 10 per cent while food inflation climbed to 8.6 per cent in June.
The higher fuel costs have increased operating expenses for manufacturers, transporters and other businesses while eroding household purchasing power.
The World Bank estimates that the higher cost of living could push between one million and 2.4 million more Kenyans below the poverty line this year, depending on how much of the fuel price increase is passed on to consumers.
Kenya's external position has also weakened as the country's petroleum import bill rose while exports and diaspora remittances slowed.
According to the report, the current account deficit widened from 2.4 per cent of GDP at the end of 2025 to 3.7 per cent in the first quarter of 2026 as imports increased and conflict-related disruptions affected trade.
Foreign exchange reserves have declined from a record $14.6 billion (Sh1.88 trillion) in March to $13.1 billion (Sh1.69 trillion)in June, although they remain above the statutory minimum of four months of import cover.
Despite the external headwinds, some sectors of the economy continued to perform strongly in 2025.
"Construction rebounded sharply, helping industrial growth accelerate to 4.7 per cent, while mining expanded by nearly 15 per cent. Tourism also remained resilient, with accommodation and food services recording double-digit growth as international arrivals recovered," World Bank notes.
Agriculture, however, slowed after drought affected crop production in the final quarter of last year, while services such as transport, trade and finance also lost momentum.
The report further raises concern over Kenya's fiscal position.
Government revenue continued to miss targets during the first nine months of the 2025-26 financial year due to weak income tax and VAT collections, while expenditure remained above target because of higher pension costs, operations spending and development expenditure.
As a result, the fiscal deficit widened to 4.7 per cent of GDP, above the budget target of 4.1 per cent, forcing the government to rely heavily on domestic borrowing.
Public debt remains elevated at around 69 per cent of GDP, while interest payments consume more than a third of government revenues.
The World Bank warns that sustained reliance on domestic borrowing risks crowding out credit to the private sector despite recent improvements in bank lending.
To strengthen long-term growth, the lender is urging the government to pursue deeper fiscal reforms by broadening the tax base, improving tax administration, enhancing spending efficiency and strengthening governance of public finances instead of relying mainly on higher tax rates.
It also recommends accelerating structural reforms that support private investment, productivity and job creation while strengthening fiscal responsibility laws to rebuild investor confidence and reduce borrowing costs.
Although risks remain tilted to the downside due to global geopolitical tensions, climate shocks and election-related uncertainty, World Bank says Kenya can still build a more resilient economy through reforms.
"Expansion of renewable energy, digital infrastructure and regional trade integration can also support private sector-led growth and employment."
