Kenya’s Economic Growth Faces New Risks as Middle East Conflict, El Niño Threaten 2027 Outlook

Kenya’s economic growth is expected to remain positive in 2026 and 2027, supported by a recovery in industry, resilient services and infrastructure investment, but rising global uncertainties and climate-related shocks could weigh on the outlook, according to an economic presentation delivered during the KCB Kenya Economic Outlook PowerTalk Series at the Radisson Blu Hotel in Nairobi.

KCB Kenya projects Kenya’s economy to grow by 4.5% in 2026 and 4.7% in 2027, based on International Monetary Fund (IMF) forecasts. The outlook comes against the backdrop of heightened geopolitical tensions, rising global energy prices and the expected El Niño weather conditions from October 2026.

Data presented at the forum showed that Kenya’s real gross domestic product (GDP) growth accelerated to 5.3% in the first quarter of 2026, up from 4.9% in the corresponding period in 2025. The improvement was attributed to a recovery in the industrial sector and continued resilience in services.

Construction has been a key driver of the industrial recovery, while services are expected to benefit from the continued digitisation of the economy and expansion of e-commerce. Improved credit uptake across manufacturing, building and construction, agriculture, consumer durables and trade is also expected to support economic activity.

However, the presentation warned that the economic impact of the US-Israel conflict with Iran was likely to have weakened growth in the second quarter and into the third quarter of 2026, largely through higher domestic fuel prices and weaker economic sentiment.

The conflict has heightened concerns about global energy supplies, particularly disruptions affecting commercial shipping and supply chains. For Kenya, which relies on imported petroleum products, prolonged increases in international oil prices could raise transport and production costs, feed into consumer prices and put pressure on household spending and business margins.

The outlook will partly depend on how the conflict develops. A resolution that allows energy supplies to normalise could ease inflationary pressures, while an escalation could keep oil prices elevated and complicate efforts to maintain price stability.

It outlined a potential recovery scenario in which productive negotiations could lead to a preliminary agreement by the first quarter of 2027, allowing fuel prices to decline to between US$70 and US$80 per barrel. Under a more adverse scenario, a return to high-intensity conflict could keep prices above US$90 per barrel, prolong inflationary pressures and increase the likelihood of further monetary policy tightening.

Beyond geopolitical risks, Kenya’s economic performance will also depend on domestic price trends, the exchange rate, weather conditions and the cost of borrowing.

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Inflation and interest rates remain key to business confidence

Kenya’s price outlook is expected to remain broadly stable into 2027, supported by monetary policy measures, government interventions and relative exchange-rate stability. However, the presentation noted that headline inflation had moved above the midpoint of the target range, partly because of rising fuel prices and persistently high global energy costs.

Core inflation was also reported to be rising, signalling broader price pressures that could influence monetary policy decisions.

At the same time, KCB identified appropriate monetary policy actions, government interventions such as fuel-related tax reductions and subsidies, and exchange-rate stability as important factors in containing inflation. A stable shilling helps moderate imported inflation by limiting the local-currency cost of goods and inputs purchased from abroad.

Short-term interest rates are expected to remain in single digits into 2027, supported by an accommodative monetary policy stance. Continued domestic borrowing by the government, backed by liquidity in the local market, is also expected to shape financial conditions.

For businesses, the direction of inflation and interest rates will remain important in determining the cost of working capital, investment financing and consumer credit. Lower borrowing costs could encourage investment and support demand, while renewed inflationary pressure could limit the room for further monetary easing.

The shilling has shown marginal volatility despite elevated global uncertainty, supported by remittance inflows, tourism receipts and adequate foreign exchange reserves, according to the presentation.

These inflows remain important in supporting the availability of foreign currency and helping cushion the economy against external shocks.

El Niño threatens agriculture, food prices and essential services

Climate-related risks are another major concern for Kenya and the wider East African region, with El Niño conditions expected from October 2026 potentially disrupting agricultural production, transport and the provision of essential services, including education and healthcare.

The presentation cautio