The International Monetary Fund (IMF) has projected a wider fiscal deficit for Kenya, in the wake of war in the Middle East, signalling increased borrowing to plug the expanded budget hole.
The multilateral lender expects the deficit to deteriorate to 6.4 percent of gross domestic product (GDP) in 2026 from an initial October 2025 estimate of 5.6 percent.
A rise in the price of petrol at the pump is just the beginning in the wake of Iran’s closure of the Strait of Hormuz that has caused energy prices to surge.
Food production looks set to be damaged by fertiliser shortages which will lead to further inflation. The spike in the price of the commodities will see governments in emerging countries make interventions like subsidies, triggering fiscal distress.
Nations would find it hard to end subsidies on energy and food prices, warns the IMF as it cut Kenya’s growth forecast from 4.9 percent to 4.4 percent in the wake of the war.
This will slow revenue growth amid a rising in unexpected expenditures, prompting a wider deficit. The halving of value added tax (VAT) on fuel products is expected to take out about Sh13 billion from State coffers.
Government debt as a percentage of GDP is expected to also rise to 72.4 percent from 70.1 percent in its previous October 2025 estimate.
Additional data from the IMF suggests that Kenya will raise its domestic borrowing target to fund the wider deficit as external debt, as a percentage of GDP is set to fall to 29 percent from an earlier projection of 32.7 percent.
‘A new supply shock has hit the region. The war in the Middle East has pushed up oil and gas prices, tightening fuel availability in many countries, such as Ethiopia, Kenya, the Democratic Republic of Congo, Malawi, Nigeria and Zimbabwe,’ the IMF said in its Sub-Saharan Africa Economic Outlook report.
‘In some economies, disruptions of fuel supply are affecting electricity generation, transport and mining. Higher fertiliser prices are adding risks to agricultural output and food inflation, while shipping disruptions have increased costs and impacted trade.’
Kenya was already facing fiscal pressures from underperforming domestic revenues and increased spending pressures which have resulted in the first supplementary budget for the fiscal year running to June 30.
Total revenue collected including taxes and ministerial appropriations in aid, as of the end of December 2025 amounted to Sh1.525 trillion against a target of Sh1.636 trillion, resulting in a new Sh111.6 billion hole. Ordinary revenue or taxes were off the mark by Sh110.6 billion while ministerial A-i-A was above target by Sh1 billion.
Collected taxes totaled Sh1.241 trillion against a target of Sh1.351 trillion.
‘Ordinary revenue targets recorded below target performance during the period under review, except investment revenue, import duty and import declaration fees (IDF) which surpassed target by Sh16.6 billion, Sh1 billion and Sh129 million respectively,’ the National Treasury said in its latest quarterly budget review and outlook paper.
The revenue shortfalls and new spending pressures culminated in the first supplementary budget which pushed up total spending to a projected Sh4.532 trillion from the Sh4.269 trillion approved in June last year.
The tax revenue target was trimmed from Sh2.627 trillion to Sh2.6 trillion for the fiscal year running to June 30 to factor the below target performance so far.
The 2026 budget policy statement projects the financing gap for the current fiscal year at Sh1.14 trillion from a lower Sh901 billion in the original budget.
Domestic borrowing is expected to plug the bulk of the funding requirement at Sh885.9 billion while net foreign financing is projected at Sh254.8 billion.