Kenya’s fiscal gap is expected to widen as the ripple effects of the Middle East conflict drive up energy and food prices, placing significant strain on public finances and increasing the nation’s borrowing requirements.
The International Monetary Fund (IMF) warns that higher import costs and rising inflation risks are beginning to stifle economic growth and dampen revenue collection, leading to a more challenging economic outlook for the country. Consequently, the IMF adjusted its projections, now expecting the budget deficit to hit 6.4% of GDP in 2026 – a notable increase from the 5.6% forecasted in late 2025.
The multilateral lender highlighted these pressures in its latest Sub-Saharan Africa Economic Outlook report, noting that a fresh supply shock has hit the region.
“A new supply shock has hit the region. The war in the Middle East has pushed up oil and gas prices, tightening fuel availability in many countries, such as Ethiopia, Kenya, the Democratic Republic of Congo, Malawi, Nigeria and Zimbabwe,” the IMF said.
The report further explains that fuel shortages are disrupting vital sectors like electricity generation, transport, and mining across various economies. Additionally, the soaring cost of fertilizer poses a direct threat to agricultural output and food security, while shipping delays continue to inflate costs and hamper international trade.
Locally, the impact of these global tensions has already reached the pump. Following Iran’s closure of the Strait of Hormuz, global energy prices surged, leading to immediate increases in domestic petrol prices. Compounding this challenge, experts anticipate a dip in food production due to persistent fertilizer shortages, which could trigger a fresh wave of inflation across the country.
The IMF has warned that emerging economies may face a difficult choice: intervene with subsidies to protect consumers or risk deeper fiscal instability. The lender noted that once such measures are introduced, governments often find them difficult to withdraw. Due to the economic fallout from the Middle East conflict, which is expected to dampen revenue while driving up emergency spending, the IMF has downgraded Kenya’s growth forecast from 4.9% to 4.4%.
This fiscal pressure is already visible in recent policy shifts. To provide immediate relief at the pump, the government slashed the value-added tax (VAT) on fuel products from 16% to 8% effective April 15, 2026. While this move cushions citizens, it is projected to cost the state approximately Sh13 billion in lost revenue.
Consequently, Kenya’s debt profile is shifting. Public debt is now expected to climb to 72.4% of GDP by 2027, surpassing earlier estimates of 70.1%. IMF data suggests the government will increasingly turn to domestic markets to fund this widening gap; the share of external debt is now projected to drop to 29% of GDP, down from the previous forecast of 32.7%.
