Kenyan shilling pressure rises from Iran war fuel costs

The Iran conflict is testing Kenya’s currency defences. Citi expects renewed pressure on the Kenyan shilling as higher fuel prices widen the current account deficit, forcing the Central Bank of Kenya to choose between stability and export competitiveness.

Oil comprises 25 percent of Kenya’s import bill. When global crude prices spike, the mathematics are brutal: a wider trade deficit, currency depreciation risk, and slower growth. The Energy and Petroleum Regulatory Authority announced on 14 April the largest fuel price adjustment in over 21 years—petrol rose KSh 28.69 per litre to KSh 206.97, whilst diesel climbed KSh 40.30 to an all-time high of KSh 206.84. The landed cost of imported petrol rose 41.5 percent; diesel jumped 68.7 percent.

The CBK has projected the current account deficit to widen to 3 percent of GDP in 2026, up from an earlier estimate of 2.4 percent. David Cowan, Citi’s Chief African Economist, framed the challenge plainly: “When 25 percent of your import bill is oil, your current account is going to widen, and you are going to have to see some pressure on your currency. This is going to be a big test.”

The Case for Controlled Depreciation

Citi suggests the CBK could allow the shilling to weaken as a shock absorber. Depreciation would cheapen Kenyan exports in international markets at a time when global demand is weakening. The bank’s analysis points to potential controlled depreciation pressure as an economic adjustment mechanism.

The shilling has held steady at Sh129.04 against the US dollar, trading within a narrow band of Sh129 to Sh130. This stability masks underlying pressures. Remittance flows from Gulf countries have slowed, adding to the current account strain. Yet the CBK maintains that foreign exchange reserves exceeding $13 billion provide sufficient buffer to manage short-term shocks and ensure orderly depreciation if needed.

Liquidity Masks Deeper Risks

The paradox is striking: ample foreign exchange liquidity coexists with widening external imbalances. The CBK attributes the shilling’s strength to diversified FX inflows and increased economic confidence, reversing the acute shortage of early 2024 when the shilling hit Sh160.75. That crisis prompted the CBK to execute a Sh258 billion ($2 billion) Eurobond buyback in mid-February 2024.

Cowan acknowledged the puzzle: “It’s quite difficult to understand where the Kenya shilling lies, but the reality is that on the ground in Nairobi, at this point, there are no FX shortages and there is ample liquidity in the FX market.” Yet this liquidity may obscure the structural damage inflicted by sustained high oil prices. Kenya has requested rapid financial assistance from the World Bank to cushion against rising energy costs and inflationary pressures.

For investors, the test ahead is whether Kenya’s policy buffers—strong reserves, exchange rate flexibility, and external support—can absorb the combined shock of higher import costs, slower remittances, and weakening global demand. The shilling’s stability today may prove fragile if oil prices remain elevated and the current account deficit widens as projected.

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