Source: The Conversation – France in French (3)– By Gaëlle Balineau, Development Economist, French Development Agency (AFD)
Since 2020, Kenya, which recently co-chaired with France in Nairobi the “Africa Forward” summit on May 11 and 12, has endured without collapsing the Covid-19 pandemic, but also droughts, a surge in raw material prices, and the effects of regional instability. This apparent resilience hides a structural fragility: investment is low, energy dependence is high, and social and political tensions persist. While the war in Iran directly impacts the country’s economy, will the shilling and foreign exchange reserves hold this time?
Since 2020, Kenya has experienced the same external shocks as the rest of the world – Covid-19, rising commodity prices, tightening financing conditions, and the reconfiguration of the global geopolitical and economic order. But in the Kenyan case, one must also adddroughtsrecurring in East Africa, thelocust invasionsand the proximity of armed conflicts – or even civil wars – in Ethiopia, Sudan and the Great Lakes region (DRC, Rwanda).
While it is important to highlight that Kenya generally manages to withstand these external shocks, the respite may only be short-lived. In the short term, the war in Iran could once again destabilize the country. In the medium and long term, significant reforms are necessary to reduce the country’s vulnerabilities by increasing investment, productivity, and the inclusiveness of an economy partly captured by the ruling elites.
Between 2020 and 2022, Kenya avoided a triple crisis
During the Covid-19 pandemic, Kenyan authorities implemented various measures, including lockdowns, curfews, mask mandates, travel restrictions, and vaccination. The Ministry of Health’s figures report 5,638 deaths in a country of about 55 million inhabitants. Even though studies show these figures could be underestimated, theexcess mortalitywould have been limited to the Delta wave (SARS-CoV-2 variant) and to those over 65 years old. Kenya avoided a major health crisis.
On the other hand, the pandemic, as well as the droughts and the rise in raw material prices due to Russia’s invasion of Ukraine, caused a deterioration in the country’s economic situation and that of its inhabitants, particularly the most vulnerable: while the recession was limited to 0.3% in 2020, the poverty rate (set at the threshold of 4.20 dollars per day in purchasing power parity) rose from 56.8% to 65.6% between 2019 and 2020.
On the eve of the presidential and general elections in August 2022, inflation was about to reach its peak at 9-10%, subsidies on oil prices and other “Covid-19” supports were fading, and violent protests against the rising cost of living were taking place. In this context, the elections were described as“Triumph for Kenyan democracy”inasmuch as they took place without major disturbances compared to a history of violence – oftenwrongly qualified as “ethnic”.
2023-2024: the “Ghanaian” specter of a default on external debt
Nevertheless, Kenya’s economic structure remains fragile. The image of thestart-up nation, the sixth largest economy in Africa with a growth of 5%, attracting investors from around the world in the information and communication technology sector, coexists with another reality: the Kenyan economy, based on agriculture and services, suffers from weak investments (see chart 1), is low in productivity, and primarily exports lightly processed agricultural raw materials (tea, coffee, cut flowers).
Tourism revenues (2.9% of GDP in 2024), and the foreign currency brought by migrants (3.4% of GDP) are not sufficient to balance the current account, structurally in deficit due to dependence on imports of energy, capital goods, and food during droughts.
Thus, at the height of the post-invasion energy crisis in Ukraine, the current account deficit reached 5% of GDP in 2022, of which 4.5 points were related to energy imports. Access to foreign currency is therefore necessary given Kenya’s external financing need, which reached 5.8% of GDP in 2022 (see chart 2).
However, the country attracts less investment from abroad than Rwanda, Uganda, Tanzania, and countries in its income class on average (see chart 3).
In 2022, the use of international markets was moreover excluded, thespreadsKenyans having reached 14% in July 2022, reflecting the monetary tightening in wealthy countries, but also the uncertainty linked to the pre-election period. S&P, Fitch, and Moody’s had all downgraded Kenya’s sovereign rating within six months, between December 2022 and May 2023. From then on, Kenya had to draw on its foreign exchange reserves to cover its external financing needs.
In May 2023, reserves are at their lowest since 2019 (see chart 4), and the prospect of a default on the repayment of theEurobondof 2 billion dollars, maturing in June 2024, is stirring the markets that have in mind theGhana default in 2022. Otherwise self-fulfilling, these anticipations had severe repercussions on capital flight, financing conditions, the exhaustion of foreign exchange reserves, and the depreciation of the shilling: after years of parity maintained around 100 KES/1 USD, the shilling reached a historic low at 162 in January 2024 (a real depreciation of 16.9% over the year 2023).
After months of diplomacy and active government communication, and with very strong support from donors, the IMF urgently approved aexceptional loan of 941 million dollarsin January 2024. This contribution combined with the issuance of 1.5 billionEurobondin February 2024, benefiting from the international monetary easing, theKenya will repay itsEurobond.
War in Iran, elections in 2027: a tense situation
In 2024-2025, Kenya is recovering from these multiple external shocks in a very mixed situation. Macroeconomic indicators show good performance, but the socio-political situation is tense.
Unlike its regional peers, Kenya is far from having regained itspoverty levelpre-pandemic: the one below the threshold of 3 dollars/day even increased by 37.7% to 43.8%. SomeLarge-scale demonstrations, suppressed by force, took place in 2024when the government proposes a finance bill aimed at restoring public accounts, which was based on taxes on everyday products and digital services, in particular. The government will abandon some of the measures but, in a context ofcapture of economic power by the ruling elites, he does not resolve to carry out certain necessary structural reforms to stimulate the economy (more closed than its peer or reference countries(see graph 1) nor to adopt a deficit reduction policy that would not be based on taxation disproportionately affecting the poorest. These blockages have led tothe early termination of the IMF program in the country in 2025.
If the war in Iran were to prolong, the impact would be significant,viathe same external and internal channels that rocked Kenya in 2023-2024: oil has represented about 20% of imports since 2021 (half from the United Arab Emirates and an additional quarter from other Gulf states). Thus, the trade balance is expected to be weakened by the rise in the energy bill, and even more so if the increase in airline ticket prices reduces tourism.
The current account deficit is thus forecast at 4.1% by the IMF (compared to 3.4% before the war). If these trends were to continue, there is a high risk of witnessing a depreciation of the shilling, capital flight, and a tightening of international financing conditions. For the moment, spreads slightly increased at the start of the war, but they returned to their pre-war level at the end of April. On the reserves side, the Middle East crisis arrives at a time when they are, both in volume (around 13 billion dollars) and in import-equivalent months (5.5), at a historically high level.
However, the recent drop visible on graph 4, partly linked to an early repayment of debt securities just after an issuance like in 2024, could also be a sign that Kenya is beginning to draw on its reserves to pay for its imports and/or tosupport the shilling.
On the domestic side finally, oil accounts for 12% of the consumption basket of Kenyans, and food, affected by the rising price of fertilizers, 36%. The increase in energy prices already has a visible impact on inflation: +5.6% in April 2026 compared to April 2025, and +6.5% just for transport prices between March and April 2026, which is the biggest increase since the peak of April 2022. However, with a public deficit initially estimated at 5.6% of GDP in 2026 by the IMF, but which should now reach 6.4%, the government has very little room to support an already much-strained population… one year before a presidential election that could once again be accompanied by a rise in tensions.
Gaëlle Balineau does not work for, advise, hold shares in, or receive funds from any organization that could benefit from this article, and has declared no affiliations other than her research institution.
–ref. War in Iran: Kenya’s resilience once again put to the test –https://theconversation.com/war-in-iran-kenya-s-solidarity-tested-again-282569