Introduction: Entering the Channel – A More Constrained but Clearer Course
Kenya’s economic outlook for 2026 reflects a transition from stabilisation to cautious consolidation, as improved macroeconomic conditions coexist with increasingly binding fiscal constraints. Following a somewhat tepid real gross domestic product (GDP) growth of 4.7% in 2024, the economy found its wind in 2025, with output estimated to have expanded by 5.3%. This recovery was not merely a product of statistical base effects but was underpinned by the quiet resilience of the agricultural heartland and a robust rebound in the services sector during the latter half of the year. While the momentum was reinforced by increased milk production, a blossoming floriculture export market, and Kenya’s burgeoning reputation as a regional “MICE” (Meetings, Incentives, Conferences, and Exhibitions) hub, threats loom. As we look toward 2026, the central question is whether the transition from emergency stabilisation to cautious consolidation is a sustainable evolution or merely a temporary reprieve before the political tides of the 2027 general elections begin to pull.
GDP Growth: Maintaining Speed Without Overturning the Vessel
Kenya’s growth trajectory in 2025 offers genuine cause for optimism. Real GDP expanded by 4.9% in the first quarter, edged up to 5.0% in Q2, and held steady at 4.9% in Q3 – comfortably outpacing the corresponding periods in 2024. Agriculture proved resilient, buoyed by improved milk production and strong export demand for cut flowers. Services, particularly financial services, ICT and tourism, continued to anchor economic activity, whilst construction staged a modest comeback as public infrastructure projects resumed.
Figure 1: Kenya’s Real GDP Growth Rate (2014 – 2026f)
Source: Kenya National Bureau of Statistics, Agusto & Co. Research
Looking ahead to 2026, Agusto & Co. projects a further strengthening to 5.6%. This optimism is predicated on the continued resilience of agriculture – assuming favourable weather patterns and improved input availability – and a recovery in construction as public infrastructure projects, previously stalled by liquidity crunches, resume.
Yet, there is a caveat. The growth in 2026 will be increasingly “private sector-led” by necessity rather than by design. As fiscal consolidation limits the government’s ability to act as a growth catalyst, the burden of expansion falls squarely on the shoulders of private enterprise. The risk, therefore, is that the heavy anchor of public debt may drag on this engine room, preventing the economy from reaching the “cruising altitude” required to meaningfully reduce unemployment and poverty.
The services sector particularly financial services, transport, information communication technology (ICT) and tourism, is likely to remain the primary stabiliser of growth, supported by improving business conditions, expanding regional trade, political stability and ongoing digitalisation. Meanwhile, industrial activity is expected to recover unevenly, with manufacturing benefiting from improved input availability and steady domestic demand, albeit constrained by cost pressures and subdued public investment.
Inflation and Monetary Policy: Calibrating the Compass
One of the silver linings in the current outlook is the relative taming of the inflationary beast. According to the Kenya National Bureau of Statistics, the Country’s average annual inflation declined to 4.1% in 2025, a significant achievement given the global headwinds. This disinflationary trend was not an accident; it was the result of a deliberate, albeit painful, tightening of the screws by the Central Bank of Kenya (CBK).
Figure 2: Kenya’s Average Inflation Rate (%) (2014 – 2026e)
Source: Kenya National Bureau of Statistics, Agusto & Co. Research
With food prices stabilising and the Shilling finding a temporary equilibrium, the CBK shifted its stance in 2025 from “aggressive tightening” to “calibrated accommodation.” The cumulative 225 basis point reduction in the Central Bank Rate (CBR) to 9% by December 2025 was a clear signal to the markets: the emergency is over, but the watch remains.
Central to this new era is the introduction of the risk-based monetary policy framework, anchored on the Kenya Shilling Overnight Interbank Average (KESONIA). In our view, KESONIA represents a sophisticated evolution in Kenya’s financial architecture. By using actual interbank transactions as a benchmark, the CBK has enhanced policy transmission, allowing for more precise credit pricing. However, for the average borrower, the “trickle-down” of lower rates remains frustratingly slow. In 2026, we expect the CBR to hold steady at 9%, provided the “triple threats” of global oil volatility, geopolitical tensions, and imported inflation do not force the CBK’s hand.
Figure 3: The Central Bank of Kenya Rates (CBR) from December 2024 – December 2026e
Sources: Central Bank of Kenya, Agusto & Co. Research
Exchange Rate: Holding the Line – Currency Stability in a Narrow Corridor
The Kenyan shilling’s performance in 2025 was nothing short of remarkable given its volatility in prior years. Averaging Kshs 129/$ throughout the year, the currency benefited from improved foreign exchange inflows, particularly remittances and tourism receipts, as well as reduced speculative pressure and restored investor confidence. We expect moderate depreciation in 2026, with the shilling weakening gradually to around Kshs 133/$. This will result from higher import demand tied to infrastructure projects and a recovery in domestic consumption. It is not a cause for alarm, some adjustment is natural and healthy, but it does underscore the importance of maintaining external buffers and keeping a lid on import-intensive spending.
The real risk lies not in gradual depreciation but in sudden shocks: a spike in oil prices, a reversal in remittance flows, or a loss of investor confidence ahead of the 2027 elections could all destabilise the currency. For now, the CBK appears to have matters in hand — but complacency is not an option.
Fiscal Position & Debt: Growth Under the Weight of Debt
The Country’s public finances in 2026 remain under pressure, as elevated debt levels and rising debt service obligations increasingly constrain fiscal flexibility. Total public debt rose by 11.9% year-on-year to Kshs 11,814.5 billion as at June 2025 and climbed further to Kshs 12,253.3 billion by November 2025. We estimate the debt stock will reach approximately Kshs 12,500 billion by December 2026. More concerning than the headline figure is the composition and cost of this debt. Domestic borrowing now accounts for 53.5% of the total, much of it at relatively high yields. External debt makes up the remaining 46.5%, exposing the country to exchange rate risk. The debt-to-GDP ratio stood at 67.8% as at June 2025 and is projected to moderate only marginally to around 67% by June 2026.
But the real pressure point is debt service. The debt service-to-revenue ratio surged to 71.2% in June 2025 — up from 68.8% a year earlier. For every shilling the government collects in revenue, over 70 cents goes straight to servicing debt. This leaves precious little for development spending, social programmes or countercyclical policy responses. We expect the debt service burden to remain broadly unchanged through FY 2025/26. Without disciplined fiscal management, rising debt obligations risk crowding out productive investment and choking off private sector-led growth. Kenya is not yet in debt distress, but it is walking a very fine line.
Capital Markets at a Crossroads: Unlocking Value or Testing Sentiment?
Faced with limited fiscal options, the government has turned to asset monetisation as a source of relief. The planned sale of a 15% stake in Safaricom Plc to Vodacom Group, valued at approximately US$1.6 billion (Kshs 204 billion), represents the most significant divestment in years. Preparations are also underway for a partial privatisation of Kenya Pipeline Company through an initial public offering on the Nairobi Securities Exchange. These initiatives signal a strategic shift toward balance sheet optimisation and private capital mobilisation. They also coincide with a sharp rebound in capital markets: total market capitalisation rose by 53% to Kshs 2.97 trillion over the ten months to October 2025, driven by strong performances in large counters such as Safaricom and East African Breweries Limited.
But asset sales are not without risk. In a pre-election environment, they invite political scrutiny and public scepticism. The perception, rightly or wrongly, that the government is “selling the family silver” to plug fiscal holes could erode public trust and embolden opposition voices. Execution will be critical: poorly managed divestments could backfire spectacularly. The deeper question is whether the market rally reflects a durable re-rating of Kenyan assets based on improved fundamentals, or merely a cyclical rebound that could reverse if reform momentum stalls. We suspect the answer lies somewhere in between, and will depend heavily on policy credibility in the months ahead.
The Political Shadow: The 2027 Factor
We cannot analyse Kenya’s 2026 outlook without acknowledging the elephant in the room: the August 2027 General Elections. In Kenya, the year preceding an election is historically marked by “policy paralysis” and a shift in focus from economic reform to political survival.
Political realignments are already beginning to take shape, and with them comes the risk of populism. There is a danger that the disciplined fiscal consolidation seen in 2025 may be abandoned in favour of “election-friendly” spending. Furthermore, investor sentiment is notoriously fickle during Kenyan election cycles. While the Country has demonstrated significant democratic maturity, the memory of past instabilities often prompts a “wait and see” approach from foreign direct investors (FDI).
The government’s ability to maintain its reform momentum, particularly regarding tax collection and state-owned enterprises (SOE) restructuring, in the face of political headwinds will be the ultimate test of its credibility. Any perceived backtracking on reforms could lead to a sharp re-pricing of Kenyan risk in the international capital markets.
The Bottom Line: Steady Hands Required
Kenya’s economic outlook for 2026 is cautiously positive but far from assured. Growth is rebounding, inflation is contained, the currency is stable, and capital markets are buoyant. Yet elevated debt, rising service costs, narrowing fiscal space and pre-election uncertainty all conspire to limit policy flexibility and heighten execution risk.
Sustaining macroeconomic stability will require disciplined coordination across fiscal, monetary and structural policies. It will demand credible asset divestment, prudent debt management and deeper private sector participation. Above all, it will require steady hands at the helm – policymakers willing to make difficult choices and resist the siren call of short-term political expediency.
Kenya has navigated murky waters before and emerged intact. Whether it can do so again will depend less on economic conditions, which are broadly favourable, and more on the quality of economic governance. The boat is seaworthy; the question is whether the crew can steer it safely to shore.
