Treasury trims economic growth forecast to 5pc on Middle East conflict

The Treasury says that locally climate-related shocks for the agriculture sector could affect economic growth. [File, Standard]

Kenya has cut the country’s economic growth forecast for 2026 to five per cent, citing the Middle East conflict that has driven up oil import costs and destabilised supply chains.

The National Treasury in budget books for the 2026/27 financial year said the impact of the US-ISrael war on Iran as well as retaliatory attacks by Iran on its neighbours hosting US military assets is already evident in Kenya, where pump prices increased by significant margins in April. It warned that a prolonged conflict is expected to further hurt the economy, with different sectors including export of Kenyan commodities as well as the import of raw materials for local industries taking a hit.

Earlier projections by the Treasury showed that the economy would grow by 5.3 per cent. Last year, the economy grew by a soft growth of 4.6 per cent, slower than the 4.7 per cent registered in 2024, with agriculture being hard hit, affected by a failed October-December rain season. 

The Middle East conflict has resulted in higher global oil prices that rose from an average of $63.06 (Sh8,198) per barrel in February 2026 to average around $100 (Sh13,000) per barrel in April 2026.

This resulted in cost of fuel going up with super petrol retailing at Sh197.60 in Nairobi from Sh178.28 per litre while diesel rose to Sh196.63 per litre from Sh166.54 per litre. 

“Against this backdrop, the 2026 growth projection has been revised downward from 5.3 per cent to five per cent. This baseline projection assumes that the conflict in the Middle East will be contained in the near term, allowing for parietal stabilisation of global energy markets,” said the Treasury in budget documents tabled in Parliament last week. 

 “However, should the conflict persist, resulting in prolonged supply disruptions and sustained high oil prices, growth would weaken further, relative to the current projection.”

 The higher fuel prices resulted to inflation going up to 5.6 per cent in April down from 4.4 per cent in March. While still within the Central Bank’s target of between 2.5 per cent and 7.5 per cent, this could go up in the coming months if the conflict in the Gulf is not resolved. 

 Treasury noted that other than the high cost of transport and production, which will push up the cost of products in the country, the war in the Middle East would also affect a wide range of sectors from agriculture produce and other goods that Kenyan exports to diaspora remittances. 

 “Additonal spillover effects also include supply chain disruptions, weaker external demand, reduced remittance inflows and subdued tourism. The elevated fuel costs are increasing transport and production expenses, thereby weighing on key sectors such as manufacturing, transport and storage, and wholesale and retail trade.,” said the Treasury. 

 “The continued disruptions to global supply supply chains are constraining the flow of goods and services and dampening both exports and import performance particularly from the region under conflict.” 

 Central Bank had in April also cut its 2026 growth projection to 5.3 per cent from an earlier estimate of 5.5 per cent. The World Bank in April said it expected the country’s economy would grow by 4.4 per cent in 2026, a downward revision from a projection of 4.7 per cent.

The projections pose another challenge for the Kenyan Kwanza regime, which has recently queried last year’s growth numbers published by the Kenya National Bureau of Statistics (KNBS). 

 President William Ruto on Friday dismissed media reports that said the economy grew at a slower rate of 4.6 per cent in 2025, numbers which came from the Economic Survey 2026, published two days earlier on Wednesday. The president said the economy is on a firm footing and that “the true story of a nation is not told in sponsored headlines” and that “the noise may command attention but it cannot and it will never change reality”.

Other than the external risks that are further threatening to slow down the Kenyan economy, the Treasury noted that locally climate-related shocks for the agriculture sector continued to be a major risk that could also affect economic growth.

“Domestically, extreme weather events such as droughts, floods and prolonged dry spells, pose significant threats to agricultural output. Disruptions in food production could lead to elevated food prices, fueling inflationary pressures and reducing household purchasing power,” said the Ministry. 

“Climate-related damage to infrastructure, including roads, bridges and irrigation systems, could further disrupt economic activities and increase government spending on emergency response and reconstruction, diverting resources from development priorities.”