Kenya’s recovery faces pressure as global risks rise,

Kenya's hard-won economic stabilisation is now under siege from external pressures that threaten to derail investor confidence across East Africa's largest economy. A new MCB Group Africa Economic Compass report warns that despite tangible progress in rebuilding macroeconomic buffers over the past 18 months, Kenya faces renewed downside risks from volatile global energy markets and mounting climate-related disruptions that could compress growth and inflate financing costs for businesses and government alike.

## Why is Kenya vulnerable to global energy shocks?

Kenya's economy remains structurally dependent on imported petroleum products—diesel for agriculture, transport, and power generation, and petrol for manufacturing. When global crude prices spike, the pressure cascades through the entire system: transport costs rise, agricultural input expenses climb, and power-generation margins tighten. This dependency is compounded by Kenya's limited domestic oil refinery capacity and persistent foreign exchange pressures that make dollar-denominated imports more expensive when the shilling weakens.

The timing is particularly precarious. After aggressive Central Bank of Kenya interest rate hikes (peaking at 13% in 2023–24), inflation stabilisation had begun attracting foreign portfolio inflows and stabilising the currency. However, geopolitical tensions in the Middle East, OPEC production decisions, and seasonal supply disruptions mean crude prices could easily push toward $90–100 per barrel—levels that would immediately test Kenya's import bill and current-account dynamics.

## What climate shocks pose the greatest threat?

Kenya's 2024 drought underscored the economy's climate fragility. Agricultural output contracted, pastoral livelihoods collapsed in northern counties, and food prices spiked despite stabilised headline inflation. The MCB report signals that the El Niño-to-La Niña transition expected in 2025–26 could bring either severe drought or erratic rainfall—both economically disruptive. Agriculture contributes ~34% of Kenya's GDP and employs 40% of the workforce, making climate volatility a systemic risk that asset-price models often underestimate.

Compounding this, water scarcity threatens hydroelectric capacity (which normally covers 40–50% of Kenya's electricity mix). Thermal and wind generation may fill gaps, but at higher marginal cost—pushing electricity tariffs upward and raising input costs for exporters and manufacturers already squeezed by global competition.

## How will this reshape Kenya's fiscal trajectory?

The government has made progress reducing the budget deficit and stabilising public debt (now ~67% of GDP), but external shocks will test that commitment. Higher energy import costs widen the trade deficit; lower agricultural exports (from climate stress) reduce hard-currency earnings. The Central Bank will face a classic dilemma: defend the currency (requiring higher rates, which slow growth) or let it weaken (accepting imported inflation and rising debt-servicing costs in foreign currency).

For investors, this environment demands selectivity. Sectors insulated from commodity price shocks—financial services, telecommunications, tourism (if security improves)—may outperform. Meanwhile, manufacturers and agribusinesses face margin compression unless they can pass costs to consumers or hedge currency exposure.

Kenya's recovery is real but fragile. The next 12 months will test whether macroeconomic stabilisation has been deep enough to absorb the shocks the global and climate systems will almost certainly deliver.

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