Ruto's economy thrown into turmoil by Iran crisis

President Ruto warned that the escalating conflict in the Middle East poses a serious threat to global peace and security. [File, Standard] The dramatic escalation of hostilities between Israel and the United States on one side and Iran over the weekend has sent shockwaves through Kenya's economy, threatening hundreds of billions of shillings in bilateral trade and triggering a surge in global oil prices that could upend President William Ruto's carefully calibrated re-election strategy. With just 18 months to the August 2027 General Election, coordinated missile and drone strikes by US and Israeli forces on Iranian military and nuclear sites, which reportedly killed Supreme Leader Ayatollah Ali Khamenei, have been met with fierce retaliation from Tehran, disrupting global supply chains and jeopardising critical trade routes. For Kenya, which relies on the Middle East for the bulk of its fuel imports and maintains growing commercial ties with both nations, the conflict presents a fresh economic shock that could unravel the hard-won stability the Ruto administration has been banking on as its key re-election pitch. "This is the last thing the government needed," said independent economist Ian Njoroge. "After two years of painful stabilisation-higher taxes, currency volatility, and austerity-the administration was finally beginning to show results. An external shock of this magnitude threatens to yank all the positive dials in the wrong direction with alarming speed." According to data from the Kenya National Bureau of Statistics (KNBS), the country exported goods worth Sh6.8 billion to Iran in 2024-a market Nairobi has been aggressively courting as part of its diplomatic and commercial outreach. Simultaneously, Kenyan exports to Israel stood at Sh730.9 million, with imports from the two nations totaling Sh9.1 billion. These trade flows now hang in the balance as airlines suspend flights and shipping lines reroute vessels away from the conflict zone. Tea shipments to Iran, worth Sh4.26 billion, face imminent collapse, meat exports are disrupted, and horticulture consignments rot as flights remain suspended. Industry players warn that perishable exports cannot afford extended delays. "The horticulture sector operates on tight margins and precise timing," said a senior official at the Kenya Flower Council who requested anonymity. "Every day consignments are stuck is a day farmers lose money. We are already seeing orders cancelled." The most immediate threat, however, comes from the energy market. The Strait of Hormuz, a narrow waterway through which about a fifth of the world's global oil output passes, has effectively become a flashpoint. Iran has previously threatened to close the Strait, and even the suggestion of disruption has sent oil prices soaring. Murban crude, the benchmark for Kenya's refined fuel imports, has surged more than 10 per cent since the strikes began. Data from shipping sources indicates that freight costs for Middle Eastern routes have spiked dramatically, with some supertanker rates jumping nearly 60 per cent as vessel owners pause offerings to assess risks. This puts immense pressure on Kenya's government-to-government fuel supply deal with Saudi Aramco, the Emirates National Oil Company (Enoc), and the Abu Dhabi National Oil Company (Adnoc). While the pact, renewed in April 2025, guarantees supply at negotiated rates, the sharp increase in freight and insurance costs could test the appetite of Gulf suppliers to absorb the additional expenses. Local economists warn that any sustained disruption will stoke inflation just as the Central Bank of Kenya had celebrated single-digit inflation. Fuel prices feed directly into transport costs, electricity generation, and ultimately every item on supermarket shelves. "If oil prices remain elevated, the Energy and Petroleum Regulatory Authority (Epra) will have no choice but to pass those costs to consumers within weeks," Njoroge said. "That means higher matatu fares, more expensive food deliveries, and increased electricity bills-all of which voters feel directly in their pockets." Kenyans in the Middle East sent home Sh39 billion from Saudi Arabia alone last year, part of the record diaspora remittances that have become a critical pillar of Kenya's foreign exchange reserves and shilling stability. Oil prices With an estimated 500,000 Kenyans caught in the conflict zone and flights grounded indefinitely, that critical dollar inflow faces significant disruption. Many Kenyan workers in the Gulf region are employed in sectors-construction, hospitality, domestic work-that are highly sensitive to economic downturns and political instability. "These workers are already among the most vulnerable," said a migration policy expert who requested anonymity. "If the conflict drags on, we could see job losses, salary delays, or forced returns. Even temporary disruption to remittance flows will be felt in Kenya, where many families depend on this income for school fees, rent, and daily expenses." The potential hit to remittances comes at a delicate moment. The Kenyan shilling has enjoyed rare stability in recent months, trading flat at around 129 per US dollar, supported by foreign exchange reserves standing at a record high of $12.66 billion-sufficient to cover 5.5 months of imports. London-based financial services firm Ebury said in its latest Africa FX Outlook that the Central Bank of Kenya has been able to actively support the currency through export inflows, diaspora remittances, a $500 million loan from Abu Dhabi, and Eurobond proceeds. But Ebury Senior Market Analyst Roman Ziruk warned that structural problems remain acute. "Fiscal challenges continue to cast a shadow over the shilling's outlook, with reforms slow and revenues failing to keep pace with spending," Ziruk said. "Kenya's relative economic resilience and access to international funding could provide the shilling with short-term stability, but careful fiscal management will be critical to sustaining it." Worst moment The economic fallout lands at the worst possible moment for the Ruto administration. With 18 months until Kenyans head to the polls, the president had bet heavily on stabilisation-lower interest rates, falling inflation, a stronger shilling-as his re-election platform. An Infotrak poll released in December showed 46 per cent of voters rank the cost of living as the top factor deciding their choice in 2027, followed by youth unemployment at 25 per cent. The Ruto government's budget for the 2026/27 fiscal year, unveiled in February, was explicitly designed as an electoral blueprint-pivoting from years of painful austerity toward targeted spending on jobs, youth and small businesses. The Sh4.7 trillion budget plan doubles down on signature campaign pillars: sustaining the fertilizer subsidy programme for 4.4 million farmers, scaling the Hustler Fund to Sh100 billion, creating 300,000 digital jobs for Gen Z, and accelerating the Affordable Housing project that has generated over 428,000 jobs. "The 2026 budget is a deliberate acceleration of BETA's five pillars, each chosen for its direct household impact and job creation potential," independent economist Njoroge said. "The political messaging is clear: the government is putting cash directly into the pockets of young entrepreneurs, subsidising fertilizer for millions of farmers, and creating jobs. An external shock that reignites fuel prices and food costs will amplify opposition attacks that the government cannot protect ordinary Kenyans from global forces." The revenue picture was already strained before the conflict erupted. National Treasury data presented to Parliament in January showed the government collected Sh1.50 trillion in total revenues by December 2025, missing its six-month target by Sh136.1 billion-yet again exposing persistent weaknesses in tax collection despite sweeping administrative reforms. Ordinary revenue, predominantly taxes, underperformed by Sh115.3 billion, while appropriations-in-aid fell short by Sh20.8 billion. The gap highlighted the growing fiscal strain on an administration contending with soaring debt repayments, rising public sector wage bills, and unbudgeted emergency costs. Ordinary revenue as a share of GDP has steadily eroded, dropping from 18.1 per cent in 2013/14 to a projected 14.4 per cent this fiscal year, a trend blamed on a narrow tax base, compliance issues, and faster growth in low-tax sectors like agriculture. The revenue gap has forced greater reliance on domestic borrowing, which in the current financial year reached Sh509.2 billion by December 2025. Interest payments now consume 39.8 per cent of ordinary revenue, up from 13.2 per cent a decade ago, sharply curtailing the state's capacity to fund development and services. Treasury CS John Mbadi has already warned MPs that prolonged conflict will "hit our economy massively." With debt servicing consuming more than a third of revenue, the government has no fiscal room for the kind of subsidies that previously cushioned such shocks. Beyond immediate trade and fuel concerns, stakeholders warn that the Port of Mombasa is bracing for congestion as shipping lines alter their schedules and containers are misplaced due to route changes. Importers face potential demurrage charges and delays for goods ranging from raw materials to finished products. "Every day containers sit at the port unpaid, importers incur costs that will eventually be passed to consumers," said a clearing agent at the port. "The logistics chain is finely balanced. Any disruption creates a ripple effect that takes months to unwind." The Nairobi Securities Exchange, which had been enjoying a strong rally on the back of macroeconomic stability, now faces renewed uncertainty. Foreign investor sentiment, already cautious on emerging markets, could sour further if the conflict escalates and oil prices remain elevated. The National Treasury, in its recent presentation to the National Assembly, highlighted geopolitical tensions as a key risk to the fiscal outlook, emphasizing a "difficult balancing act" in shielding the economy from external shocks while maintaining growth. The African Union has also sounded the alarm, with Commission Chairperson Mahmoud Ali Youssouf warning that further escalation could destabilise energy markets and strain the economic resilience of vulnerable nations like Kenya. For Kenyan households, the primary concern is the return of pain at the pump. While prices had moderated slightly in early 2025 due to lower global costs, the current crisis is expected to reverse that trend. EPRA's pricing model reflects global trends with a lag, meaning the full force of the latest price spike is yet to be felt by consumers. A surge to even $100 per barrel-which analysts do not rule out if the Strait of Hormuz is disrupted-would have a cascading effect on the cost of transport, food, and electricity, complicating the Central Bank's efforts to keep inflation anchored. With just 18 months to the election, the Ruto administration faces a precarious position. The president's economic team had crafted a narrative of recovery: inflation down, shilling stable, growth resilient. The Iran conflict threatens to puncture that narrative just as the campaign heats up. "The government can blame external factors, and it would be right to do so," Njoroge said. "But voters don't distinguish between domestic and external shocks. They feel the pain at the pump, in their electricity bills, and in the cost of food. If that pain returns after two years of sacrifice, it will be difficult to convince them that the trajectory is still positive." The government has not yet announced any specific measures to cushion consumers from the expected fuel price increases. Energy Cabinet Secretary Opiyo Wandayi has assured the country and the region that the country has enough energy stocks to last the country until April. Treasury officials indicate they are monitoring the situation closely but have limited tools at their disposal. "We are in uncharted territory," a senior Treasury official said, speaking on condition of anonymity. "The fiscal space we had in 2022-when we last faced a major fuel shock-is gone. We cannot afford the subsidies we once could. We are hoping for a swift diplomatic resolution, but we must prepare for all scenarios."

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