Kenya’s currency could come under renewed pressure if the war involving the United States, Israel and Iran escalates, with analysts warning that the Kenyan shilling may depreciate by between eight and 30 per cent against the US dollar.

According to the Institute of Economic Affairs analysis (IEA) released on Friday, March 13, 2026, the potential weakening of the shilling is tied to how global investors react to geopolitical conflicts, widening interest rate differences between Kenya and the United States, and Kenya’s sizeable external debt obligations.

Conflicts in the Middle East have historically triggered what economists call a flight to safety. During such periods, global investors tend to move their capital away from emerging and frontier markets into perceived safe-haven assets such as the US dollar and US government securities.

This shift strengthens the dollar while weakening currencies in smaller economies like Kenya.

“US-Kenya interest differential combined with elevated risk premiums on Kenyan assets will drive bilateral shilling depreciation of between eight and 30 per cent or more depending on the severity of the conflict,” the IEA said in its analysis.

If that scenario materialises, the shilling could weaken to between Ksh139.64 and Ksh168.09 per dollar. On Friday, March 13, 2026, the Central Bank of Kenya quoted the currency at Ksh129.30 to the dollar. A weaker shilling would have immediate fiscal implications for the government, particularly in servicing foreign debt.

Kenya has a significant portion of its public debt denominated in foreign currencies, mainly the US dollar. Economists estimate that a 20 per cent depreciation of the shilling would raise the cost of servicing external debt by a similar margin.

This would increase pressure on public finances, widen the fiscal deficit and potentially limit the ability of policymakers to ease monetary conditions. At the same time, the expected currency weakness may not immediately translate into higher export earnings.

Kenya’s key exports, including tea, coffee and horticultural products, are largely price-inelastic in the short term. This means export volumes do not quickly rise when the currency weakens, limiting the immediate benefit of a cheaper shilling.

Meanwhile, the cost of imports such as oil, fertiliser and industrial machinery would rise almost instantly, increasing demand for foreign currency and putting further strain on the shilling.

The combined effect could worsen Kenya’s current account position before any potential long-term benefits from improved export competitiveness emerge.

Since June 2024, the shilling has remained relatively stable at around Ksh129 per dollar following tight monetary policy and improved foreign exchange inflows.

However, IEA warn that a prolonged global crisis could strengthen the dollar further, testing Kenya’s currency stability and placing additional pressure on foreign exchange reserves.