IMF tells Kenya to brace for Iran war fallout as loan talks stall
Business
By
Brian Ngugi
| Mar 07, 2026
IMF urges Kenya to prepare for economic fallout from the Middle East conflict as loan talks stall. [File Courtesy]
The International Monetary Fund (IMF) has urged Kenya to bolster its financial buffers against economic spillovers from the Middle East conflict.
The Bretton Woods institution warns that the escalating crisis poses fresh risks to an economy already grappling with fiscal strains amid stalled negotiations for a new financing programme.
At the conclusion of a nine-day mission to Nairobi on March 4, an IMF staff team led by Haimanot Teferra said in a statement that discussions with Kenyan authorities would continue during the upcoming IMF-World Bank Spring Meetings after no staff-level agreement was reached.
The Fund’s end-of-mission statement highlighted the need to build resilience to external shocks, “including potential spillovers from developments in the Middle East.”
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The warning comes as the conflict following coordinated US and Israeli strikes on Iranian military sites sends oil prices soaring and disrupts critical trade routes.
Kenya relies on the Middle East for the bulk of its fuel imports and maintains growing commercial ties with both nations, exporting goods worth Sh6.8 billion to Iran in 2024 alone.
“The most immediate threat comes from the energy market,” said independent economist Ian Njoroge. “Murban crude, the benchmark for Kenya’s refined fuel imports, has surged more than 10 per cent since hostilities escalated. If oil prices remain elevated, the government has no fiscal room for the kind of subsidies that previously cushioned such shocks.”
The IMF’s caution reflects deep concerns about Kenya’s capacity to absorb external shocks. Public debt has crossed the Sh12.8 trillion mark, with servicing costs projected to consume Sh1.66 trillion in the coming financial year.
Interest payments now account for 39.8 per cent of ordinary revenue, up from 13.2 per cent a decade ago, sharply curtailing the state’s ability to fund development or emergency interventions. “We are in uncharted territory,” a senior Treasury official told The Standard, 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.”
The revenue picture was already strained before the conflict erupted. By the end of December 2025, total revenue collection fell short of the target by Sh111.6 billion, with ordinary revenue missing its mark by Sh110.6 billion.
Net domestic financing is now projected at Sh885.9 billion (4.7 per cent of GDP). In contrast, the overall fiscal deficit, including grants, is projected at 6.1 per cent of GDP—substantially higher than the 2.3 per cent deficit recorded in December.
Beyond the energy market, the IMF is monitoring threats to diaspora remittances, which have become a critical pillar of Kenya’s foreign exchange reserves and shilling stability. Kenyans in Saudi Arabia alone sent home Sh39 billion last year, part of record inflows that helped the central bank build reserves to a record $12.66 billion—sufficient to cover 5.5 months of imports.
With an estimated 500,000 Kenyans in the conflict zone and flights grounded indefinitely, that critical dollar pipeline faces significant disruption.
Many Kenyan workers in the Gulf region are employed in sectors 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 a temporary disruption to remittance flows will be felt in Kenya.” The IMF’s caution also reflects ongoing concerns about fiscal discipline. The Treasury recently unveiled a Sh287.4 billion supplementary budget that appears to contradict Fund demands for consolidation, increasing gross ministerial expenditure by 11.3 per cent to Sh2.84 trillion. The mini-budget allocates Sh56.7 billion for development projects, including roads, water, and energy sectors, which President William Ruto’s administration has prioritised for job creation ahead of the 2027 elections.