Kenya’s already stretched budget is facing fresh pressure as the ongoing conflict between Iran and Israel pushes borrowing costs higher, threatening to balloon the country’s debt-servicing bill at a time when the Treasury can least afford it.
Global consultancy Oxford Economics has cautioned that the Iran-Israel war has already reshaped inflation and interest-rate expectations across the African continent — regardless of whether diplomatic talks between Washington and Tehran ultimately bear fruit. Kenya is among the countries where expectations of interest rate cuts have now flipped into forecasts of rate increases, as policymakers grapple with the knock-on effects of rising fuel and food prices. The consultancy stated plainly that “higher borrowing costs will feed into debt-servicing expenses in countries already struggling to contain the growing burden of interest repayments.”
Kenya’s fiscal exposure is considerable. The government plans to borrow close to 1.15 trillion shillings in the financial year beginning July to fund a 4.82 trillion shilling budget. Of that borrowing, 1.03 trillion shillings will be sourced domestically while 116.2 billion shillings will come from external creditors. That dual dependence on both local and international debt markets leaves the country exposed to tightening conditions on multiple fronts simultaneously.
Treasury Cabinet Secretary John Mbadi has not minced words about the risk. Should the conflict persist, he warned, the government may have no choice but to revisit its spending plans. “We may be forced to re-assess our expenditure to align it to realities and revenue collections,” Mbadi said — a signal that tough fiscal decisions could be coming sooner than expected.
The numbers are already sobering. Interest payments in the coming fiscal year are projected to hit 1.25 trillion shillings, a notable increase from the 1.13 trillion recorded previously. Domestic debt obligations account for 986.7 billion shillings of that total, while foreign debt repayments make up the remaining 267.5 billion shillings — and both figures are trending upward.
The Central Bank of Kenya moved cautiously at its June 9 Monetary Policy Committee sitting, holding its benchmark lending rate steady at 8.75 percent. Policymakers pointed directly to uncertainty stemming from the Iran conflict as a key factor behind the decision to hold. Inflation, meanwhile, climbed to 6.7 percent in May, nudging toward the upper edge of the government’s target ceiling and leaving the CBK with diminishing room to ease.
Compounding the pressure is the posture of the United States Federal Reserve, which Oxford Economics expects to keep rates elevated for longer than markets had previously anticipated. That higher-for-longer stance raises the cost of Kenya’s external borrowing and narrows the path toward fiscal consolidation, especially as the government simultaneously wrestles with weaker revenue growth and fuel-subsidy commitments that continue to weigh heavily on the public purse.
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