Kenya’s current “wait and hope” approach to the ongoing crisis in the Middle East is not economically or politically feasible. Calm and calculated decisions have to be taken to avoid a deeper crisis. Evolving responses from nations far and near offer inspiration for decisive action. Writes Cuba Houghton, a Kenyan economist and public finance practitioner.
The US-Israel and Iran's war is now its fifth week, and Kenya’s government has been relatively cautious in its policy response. This is despite the local economic implications from the war, which has driven up the price of crude oil over 60% and disrupted shipping lines that its economy depends on.
Fuel is a significant determinant of Kenya's cost of living, accounting for 12% of its consumer price index. The price of fuel further influences the cost of nearly all goods and services through its immediate impact on transport and electricity costs. The Institute for Economic Affairs Kenya estimates a potential 15 - 20% rise in the cost of living in the event of a prolonged war.
Disruptions to shipping routes will also affect trade to and from Kenya’s ports, potentially undermining the flow of vital imports and staples from the Far East. Kenya still imports about 80% of its rice from partners such as Pakistan and India and 65% of its pesticides from the Asian continent using now‑troubled Indian Ocean routes.
Higher oil prices will also likely raise the value of the dollar relative to the Kenyan shilling, worsening external public debt‑servicing pressures. Experts predict an appreciation of up to 30% or more depending on the severity of the unfolding conflict. The effect may resemble late 2023, when a stronger dollar bumped up Kenya’s debt stock by up to KSh 3 billion per day. The cost of many imported raw materials, goods, and services also rose, with these costs swiftly passed on to consumers through higher prices on shelves.
While Kenya’s foreign‑exchange reserves are now in much better shape than they were in 2023, failure to act now may still leave the government facing steep social and political challenges in the coming months. If the current war in the Middle East persists and spreads, Kenyans can broadly expect higher costs of doing business and living, further stress on public services as demand rises and fiscal space tightens, and a heightened risk of social unrest as its social contract faces yet another test.
What Can Kenya Do?
In the short term, it is better to be over-prepared than to be caught unawares. In the short term, it is better to be over-prepared than to be caught unawares. A recent statement from the Office of the President assures that Kenya is paying attention to the conflict, yet it omits specific, new measures implemented to mitigate its impact. Kenya can draw lessons from the evolving responses of other nations to the crisis, which range from mild to extreme depending on their exposure.
Faced with rising transport costs, Ethiopia has rolled out emergency fuel subsidies to stabilise the price of diesel and oil, a move that Tanzania is likely to make based on its 2022 response to the Ukraine-Russia shock. Egypt and South Africa, which much like Kenya had begun easing policy rates this year, are now likely to take a tighter monetary stance to rein in imported inflation.
Further afield, several Asian economies have employed a barrage of measures that Kenya can learn from. Thailand, Pakistan, and Sri Lanka have pursued austerity measures outright, including reducing the number of working days per week and instituting fuel rationing. The Philippines, left with only 45 days of fuel supply due to disruptions, recently declared a national state of energy emergency, granting its government special powers to respond more swiftly to the oil price shock.
In the short to medium term, Kenya should consider the following as the war in the Middle East rages on:
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Institute targeted austerity measures to reduce exposure and conserve public resources. All government agencies should adopt austerity measures both in spending levels and in day‑to‑day practice. In the immediate short term, the government could mandate reduced use of government vehicles and office facilities, and potentially reduce office days for non‑essential staff. Through a Supplementary Budget and/or the coming FY 2026/27 budget, fuel and domestic and foreign travel budgets should be cut to 50-75% of current levels, to reduce the exposure of government operations to cost increases. This is especially for more administrative sectors such as Public Administration and International Relations (PAIR). This approach has precedent in Supplementary Budget I of FY 2023/24.
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Explore direct and indirect fuel consumption regulation. As oil reserves are used up in the coming weeks, Kenya must explore different modalities for fuel rationing to avoid panic buying and stockouts. An interesting option, seen in Myanmar, is an ‘odd-even’ rule where private vehicles with odd‑numbered plates buy fuel on odd‑numbered dates, and those with even‑numbered plates on even‑numbered dates.
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Strengthen social protection expenditures to protect the poorest and most vulnerable. Allocations to social protection in Kenya's budget have been declining relative to other sectors, limiting the impact of vital cash transfer programs to the elderly, persons with disabilities and vulnerable children. In its coming budget or through a Supplementary Budget, Kenya can leverage the spending savings above to increasing allocations to its National Safety Net Program to protect poor households, especially amidst the ongoing drought.
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Diversify, diversify, diversify: News of Kenya’s discussions with Mozambique to diversify energy imports is welcome and should be accelerated. This aligns with strategies in countries like India and China, which are ramping up imports of crude oil from Russia to diversify and reduce exposure to the conflict. Kenya should also pursue deeper regional integration with African partners to trade comparative advantages with its neighbours in energy and food supply.
What Kenya Should Avoid
On the flip side, Kenya should be wary of the following options:
Open‑ended, economy‑wide fuel subsidies. Broad, economy‑wide fuel subsidies using the Fuel Stabilization Fund should be approached with caution. An increasing body of research finds that broad, open-ended fuel subsidies are not only regressive, benefiting richer households more than poorer ones, but are fiscally unsustainable in the long run. If the government chooses to deploy the fund, the objectives, targeting, and time frame of the subsidies must be clearly defined to avoid prolonged, open‑ended spending.
Sudden Tightening of Monetary Policy. With rising inflationary pressures, the Central Bank is going to do what the Central Bank does in raising policy rates to cool the economy down. However, Kenya should follow South Africa's example in cautiously raise policy rates - possibly even retaining the current rate in the immediate short term.
This is due to the fact that inflation is cost-push - coming from an increase in the costs of production - rather than demand-pull, which is better placed for direct monetary policy targeting. An sudden increase in interest rates will also drive up government domestic debt costs where revenue flows are already strained.
Ignoring the Crisis. Simply maintaining the status quo would be a costly mistake. With the 2027 elections approaching, political incentives may favour delay and avoidance of the tough decisions needed to cushion Kenyans from the war’s impact. If the conflict persists, such policy sluggishness would be self‑defeating and would squander a real opportunity to show citizens and the world that Kenya is in control of its economic future and will not be caught flat‑footed.
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