Kenya braced for economic shockwaves from Iran war

Kenya is set to be hit from multiple fronts should the war by the US and Israel against Iran continue, with the economy facing higher transportation costs as pump prices go up.

And disruption of key trade routes in the Gulf will deny Kenyan firms raw materials, forcing them to scale down production and also lock exports from key overseas markets.

While analysts say the local retail cost of fuel will certainly go up in the April-May pricing cycle, there are concerns that the certainty of the country is no longer guaranteed, and Kenya could start experiencing shortages in the coming week if the conflict is not resolved.

Additionally, Kenyan exports could lose access to key markets such as the United Arab Emirates, which in 2024 was the second largest market for Kenyan exports, such as tea, flowers, fruits, and meat products

Local manufacturers could also face a shortage of raw materials, with the Ministry of Trade warning that the disruption of trade routes could affect the delivery of key inputs for industries. Manufacturers, the Ministry said, could in the coming weeks have to slow down production and possibly lay off workers.

The export of petroleum products from the Gulf region has been severely crippled following the sustained attacks on Iran by the US and Israel, as well as Tehran’s retaliation, which has involved firing missiles and drones at Gulf countries that host US military assets.

The cost of Murban crude oil has risen to $120 (Sh15,480) per barrel earlier this month before retreating to $119 from about $71 early this month.

An analysis by the Institute of Economic Affairs (IEA) paints a gloomy picture for Kenya in the weeks and months to come, if the conflict persists, noting that the blockage of the Strait of Hormuz would mean constrained fuel imports but also limited exports for Kenya's products. 

“A successful blockage or reduction in shipping activity and safety in the Persian Gulf would halt these shipments, with knock-on effects in the form of fuel shortages and skyrocketing transport costs,” said IEA in an analysis titled “The USA-Israel War on Iran: Why does it matter to Kenyans?’’

In 2024, Kenya imported refined petroleum products worth Sh575.5 billion, according to the Kenyan National Bureau of Statistics (KNBS). IEA noted that more than half of this was imported from the United Arab Emirates (UAE), where Kenya sourced products valued at Sh325 billion ($2.52 billion).

It further said that constrained imports would also affect Kenya’s trade in fuel with neighbouring countries, a significant revenue earner for the country. Kenya re-exports petroleum products to the region, including to Uganda, Rwanda, and the Democratic Republic of Congo.

“Interestingly, refined petroleum is also Kenya’s largest export at Sh117 billion ($907 million). This suggests that Kenya acts as a regional distribution hub for imported petroleum. As a result, a supply cut off would simultaneously endanger this significant revenue stream,” said IEA.

As long as the war continues, Kenya is also staring at a loss of key export markets. UAE has in recent years become a key market for Kenyan products, buying Sh101.34 billion worth of goods from the country in 2024, and was the second largest export destination after Uganda (Sh125 billion).

UAE accounted for about 9.1 per cent of Kenya’s total export earnings that stood at Sh1.11 trillion in 2024.

“An extended conflict would close the door on some of Kenya’s most lucrative trade partners,” said IEA.

Continued conflict would limit access to these markets for Kenyan produce such as tea, cut flowers, and tropical fruits.

Exports to the UAE are high on account of re-exports of jet fuel, whereby fuel consumed by carriers based in the UAE refuel in Kenya is recorded as a re-export.

IEA also noted that the conflict could affect sea routes that Kenya uses to import food products such as palm oil, wheat, and rice from markets such as Malaysia and India. 

“Kenya’s manufacturing sector also relies heavily on imported raw materials from countries such as China,’’ IEA noted

‘‘The instability in the Middle East could affect sea lanes and may result in higher insurance premiums, rerouting of ships, leading to delays of vital goods to Kenya.’’

More than 500,000 Kenyans working in the Gulf face uncertainty. Other than safety for their lives, it also means a significant reduction in remittances to Kenya from the Gulf. The amount of money Kenyans working in the Middle East remitted to Kenya stood at Sh516 billion ($4 billion) in 2024. 

“Remittances from the Gulf to Kenya could experience a precipitous fall due to unstable employment as Kenyans in the Gulf face repatriation,” said IEA.

Dawit, a local insurance agency, posted that the conflict has resulted in an increase in insurance costs, especially for marine and war-risk policies. 

“For Kenyan businesses, exports like tea, coffee, flowers, and avocados to Middle Eastern markets face higher shipping costs, delays, or rerouting, potentially increasing cargo and marine insurance needs,” the agency said.

On Tuesday this week, Lee Kinyanjui, Cabinet Secretary for Trade, Industry, and Investments, warned that in two to three weeks, some factories in Kenya might start running low on raw materials as key trade routes are disrupted. This, he noted, could lead to the stoppage of production for some factories and even layoffs. 

As Kenya stares at a crisis that could hit the economy hard, analysts say the government has, over the years, wasted opportunities to set up strategic oil reserves that could have offered the country a soft landing in scenarios such as the one unfolding in a region that is a critical source for its fuel.

Martin Chomba, Petroleum Outlets Association of Kenya chairman, last week said the lack of strategic oil reserves in the country is a major concern. Had Kenya taken the issue of Petroleum Strategic Reserves seriously, he noted, there would be a level of comfort as the reserves would be able to help absorb any shocks, such as a sudden spike in prices and even shortages.

“We do not have strategic oil reserves. We have a law that requires the ministry to provide for strategic reserves, but this has never happened. The Petroleum Act of 2019 requires the country to have strategic reserves that would last the country at the very least 90 days. But today, the installed capacity that we have cannot take us more than a month if we do not have vessels docking at Mombasa,” he said, speaking on Spice FM, adding that the country should not “sit and hope that the conflict will ease off in a few weeks.”

The government has for years been planning to set up fuel stocks — which are giant storage tanks —and at some point mandated the National Oil Corporation (Nock) to maintain reserves. The fuel would be stored by the Kenya Pipeline Company. 

Energy and Petroleum Cabinet Secretary Opiyo Wandayi claimed the country has adequate petroleum reserves, urging the public not to rush to petrol stations to hoard fuel.

“The war between America and Iran has caused a lot of anxiety across the world. However, the Kenyan Government has put in place proper strategies to ensure there is enough fuel in the country for the foreseeable future. Kenyans should not panic or rush to petrol stations to buy fuel for storage. We have enough petroleum products to keep the country moving,” said Wandayi.

The Energy and Petroleum Regulatory Authority (Epra) will today announce fuel prices for the next monthly cycle.

Kiharu MP Ndindi Nyoro also raised concerns about the situation, including what appears to be an inevitable hike in retail prices. He further pointed out that a major concern in pricing petroleum products in the country is taxes, which account for a significant chunk of pump prices.

“I know that Epra has been directed that when reviewing fuel price to increase it by a bigger margin than the increase that we have seen in the global markets,” he said, adding that the government should refrain from unnecessarily hikes and instead consider revising downwards recent tax hikes on pump prices seen over the last three years and prevented Kenyans from benefiting from the fall in global prices of petroleum over the period.

“When fuel prices went down globally, Kenyans did not feel the impact of lower prices at the pump. In the first two years (of the Kenya Kwanza administration), the government increased Value Added Tax (VAT) to 16 per cent from eight per cent, and the Road Maintenance Levy was increased by Sh7 per litre.”

“Now oil prices are going up, the time has come for the government to remove the hikes made on account of higher VAT and fuel levy because you cannot transfer the rising prices entirely on consumers.”