CBK burns through forex reserves as Iran war hits homes

Fuel prices and inflationary pressures continue to weigh on Kenya's economy. [Courtesy]

The country’s banking regulator is quietly burning through the country’s last line of monetary defence. As the three-month-old Iran war drains foreign reserves and pushes inflation to a 16-month high, a shaky US-Iran ceasefire is threatening to unravel, leaving households to bear the brunt of soaring food and fuel costs and President Ruto’s economy in limbo.  

Data released last Friday by the Kenya National Bureau of Statistics (KNBS) showed annual inflation accelerated to 6.7 per cent in May, the highest since February 2024.

The transport index, a proxy for fuel-driven costs, soared 16.5 per cent year-on-year, while diesel prices jumped 41.2 per cent from a year earlier. The pressure is now moving decisively from global oil markets to Kenyan kitchen tables.

Behind the numbers, the Central Bank of Kenya (CBK) is fighting a quieter battle within. Its foreign exchange reserves – stockpiles of dollars used to pay for imports, service debt and defend the shilling – fell by Sh40 billion in just two weeks to Sh1.71 trillion as of May 28.

That is a 2.3 per cent drawdown, and analysts warn the Apex bank cannot keep leaning on its war chest if the conflict drags on. The truce that briefly raised hopes is also looking increasingly fragile.

The US military said late Sunday it had attacked radar and command sites in southern Iran, the latest in a litany of low-level strikes amid negotiations to end the US-Israeli war that began in late February.

The United States and Iran traded attacks in the last 24 hours, potentially complicating any framework for a lasting deal.

With no tangible end to hostilities, the heads of the International Monetary Fund, World Bank, World Trade Organisation, and International Energy Agency warned last week that the conflict was generating “substantial and highly asymmetric impacts on energy supplies, food security, and economic activity” – a warning now playing out in real time in Kenyan markets.

The transport index – which captures bus fares, tuk-tuk rides and fuel – soared 16.5 per cent year-on-year in May.

Diesel prices jumped 18.4 per cent in just one month and 41.2 per cent from a year earlier. Kerosene, used for cooking by millions of low-income Kenyans, rose 25.3 per cent month-on-month to Sh191.38 per litre.

These fuel increases are rippling through the food chain and hitting Kenyan kitchens, the data shows. The food and non-alcoholic beverages index rose 9.4 per cent annually, with tomatoes up 45.7 per cent year-on-year.

Between April and May 2026, a two-kilogramme packet of sifted maize flour, a Kenyan staple for ugali in all Kenyan homes, rose to an average of Sh159.12 from Sh158.06, a monthly increase of 0.7 per cent, according to KNBS data.

Foreign debt

Over the same period, the price of a 13kg cooking gas cylinder jumped 10.5 per cent year-on-year to Sh3,471.58. Amid the Iran conflict fallout, the latest CBK data shows the banking regulator has been dipping into its foreign currency reserves. 

These stockpiles of dollars and other hard currencies are a country’s last line of defence – used to pay for imports, service foreign debt, and shield the local currency from speculative attacks. 

Depletion, or drawing down these reserves, means the country has less firepower to stabilise the shilling if the war worsens, leaving the already bruised economy more exposed to external shocks.

As of May 28, official reserves stood at $13.21 billion – equivalent to Sh1.71 trillion at the current exchange rate of Sh129.5 per dollar - down from $13.51 billion (Sh1.75 trillion) on May 14 – a loss of Sh40 billion in just two weeks.

While reserves still cover 5.6 months of imports, above the CBK’s statutory minimum of four months, the drawdown is alarming, experts say. The shilling has remained stable at around 129.5 per dollar, but analysts say that stability is increasingly artificial. “Every time the shilling flirts with 130, the CBK steps in and sells dollars,” said a Nairobi-based currency trader. “That cannot continue indefinitely if the conflict drags on.”

The Monetary Policy Committee (MPC) will meet next week on Tuesday, June 9. At its last meeting on April 8, it held the Central Bank Rate at 8.75 per cent, pausing a long easing cycle because inflation was then at 5.6 per cent, still comfortably within the target band of 5 per cent plus or minus 2.5 percentage points.

That was before the full force of the oil shock arrived. Core inflation – which strips out volatile items like fresh vegetables and energy to show underlying price pressures – rose to 3.2 per cent in May from 2.8 per cent in April, suggesting the fuel surge is beginning to stick.

Non-core inflation, driven by fresh food and energy, was 16 per cent.

Most analysts now expect the MPC to hold steady again or even consider a small hike. Rate cuts, once expected later this year, are off the table.

The yield on the 364-day Treasury Bill – a market gauge of where interest rates are headed – has crept up to 8.627 per cent from 8.588 per cent a week earlier.

For millions of Kenyan families, the war is also hitting a second critical source of cash.

Diaspora remittances – money sent home by relatives working abroad – fell 11.7 per cent in April to Sh51.4 billion ($397.8 million), CBK data show. The Gulf corridor, the second-largest source, has been hammered by job losses in construction, hospitality and domestic service as the conflict has upended Gulf economies.

That means households are being squeezed from both sides: higher prices for food and fuel, and lower inflows from family members overseas.

The heads of the International Monetary Fund, World Bank, World Trade Organisation, and International Energy Agency noted that global oil inventories were being drawn down “at a record pace” due to the loss of supply through the Strait of Hormuz.

“If shipping flows do not return to normal, continued rapid depletion of global oil inventories ahead of peak summer oil demand would present increasing risks for fuel security, market conditions, and broader economic resilience.”

Saudi Arabia

In a separate warning, IMF Managing Director Kristalina Georgieva earlier warned that if the conflict continues into 2027 and oil prices hit $125 (Sh16,000) per barrel – up from around $90 (Sh11,700) now – “then we have to expect a much worse outcome,” including inflation expectations becoming unanchored – a scenario where people stop believing the central bank can control prices.

For Jane Wanjiku, a 42-year-old food vendor in Naivasha, the Iran war has hit home already.

Her son, who used to send money from Saudi Arabia, stopped three weeks ago after losing his construction job.

“He said they were laid off and is still waiting for his employers to recall him. If nothing changes soon, he may come back home,” she said. Even if a ceasefire is reached soon, the economic pain will not disappear overnight, analysts warn.

“Even if a long-lasting deal to end the war is reached, and the Strait of Hormuz is fully reopened, it would take months for oil, gasoline, diesel and other commodity supplies to snap back to pre-war levels and thus for prices to settle back to pre-conflict levels,” said Kathy Bostjancic, chief economist at Nationwide.