Kenya’s economy is projected to grow by 5.3 percent in 2026, up from 4.9 percent last year, with Diamond Trust Bank saying the sustainability of the recovery will depend on fiscal discipline, execution of government projects and management of debt and external risks.
Kenya’s economic recovery is expected to gather pace in 2026, but its durability will hinge on disciplined public finances, effective execution of government projects and the management of risks linked to public borrowing, climate shocks and global uncertainty, Diamond Trust Bank (DTB) has said.
In its Economic Outlook for 2026, DTB projects that the economy will expand by 5.3 percent this year, compared with an estimated 4.9 percent growth in 2025. The bank attributes the improved outlook to low inflation, easing financial conditions, recovering domestic demand, targeted government spending and overall macroeconomic stability.
However, the lender cautioned that while growth is expected across most sectors, the pace of recovery will be uneven, reflecting differences in sectoral exposure to interest rates, government spending and external conditions.
Role of public investment and fiscal discipline
According to DTB, the execution of key public infrastructure and housing projects will play a central role in supporting growth momentum. Ongoing initiatives highlighted in the outlook include the Affordable Housing Programme across the country, the expansion of the Rironi–Gilgil–Mau Summit Road, and the construction of sports infrastructure ahead of the Africa Cup of Nations tournament scheduled for 2027.
Faith Atiti, DTB’s Head of Research, said the quality and pace of implementation of these projects will be as important as their scale, particularly given Kenya’s constrained fiscal space.
“The recovery is expected to be broad-based, but sector performance will vary depending on how quickly public projects are implemented and how effectively fiscal pressures are managed,” Ms Atiti said.
Kenya’s public debt has become a growing concern over the past five years, with rising debt service costs limiting funds available for development spending. This has increased the government’s reliance on domestic borrowing, particularly from local banks, reducing incentives for private sector lending and potentially crowding out investment.
DTB noted that managing the debt burden will be critical to sustaining lower interest rates and ensuring that improved liquidity in the financial system supports private sector activity rather than being absorbed by government financing needs.
Lower inflation and easing financial conditions
The bank said Kenya’s recovery over the past two years has been underpinned by a combination of reduced inflation, particularly food inflation, declining interest rates and a calmer external environment.
A depreciation of the US dollar and improved global liquidity conditions have eased pressure on emerging markets, enhancing Kenya’s access to international capital markets and reducing external financing risks.
These trends have contributed to a more accommodative monetary environment. DTB projects that the Central Bank of Kenya (CBK) will maintain a bias towards lowering the policy rate to 8.5 percent from the current 8.0 percent, offering relief to borrowers.
“There is more good news for borrowers,” DTB said, noting that easing rates should support credit growth and domestic demand.
However, the bank cautioned that the actual path of interest rates will depend heavily on the government’s appetite for domestic borrowing.
“Whether interest rates will actually reduce will depend on the government’s appetite for domestic debt,” DTB said.
Risk of crowding out private sector credit
DTB warned that an increased shift towards domestic deficit financing could redirect liquidity back to the sovereign, undermining private sector recovery.
“Across the region, we expect policymakers to maintain policies aimed at supporting further recovery, reducing the cost of living and driving sustainable growth,” the bank said. “However, an increased shift towards domestic deficit financing could redirect some of this liquidity back to the sovereign, crowding out private development.”
For Kenya, this risk is particularly pronounced given the scale of domestic borrowing required to finance budget deficits and refinance maturing debt, at a time when banks are gradually reopening credit to businesses and households.
Impact on households and consumer spending
DTB expects the improving macroeconomic environment to gradually translate into higher household incomes and increased consumer spending, although the benefits will not be evenly distributed.
“Accelerated economic growth, well-managed inflation, strengthening labour markets and the accommodative stance of the central bank are expected to support a gradual acceleration in household incomes and spending,” the bank said.
Business surveys cited in the outlook point to rising employment, which should gradually expand the consumer base and support demand across sectors such as retail, services and manufacturing.
However, DTB noted that higher-income households are likely to feel the impact of the recovery more quickly, while a large share of Kenyans will remain cautious, prioritising essential spending as incomes recover slowly.
Climate and food price risks
Agriculture remains a key driver of Kenya’s inflation dynamics and overall economic performance. Over the past three years, good rainfall and the government’s fertiliser subsidy programme have lifted agricultural productivity, contributing to lower food inflation.
DTB warned, however, that climate volatility remains a major risk. Extended dry periods that often follow seasons of good rainfall could disrupt production and push food prices higher, reversing recent gains in inflation control.
Climate-related shocks, combined with global supply chain disruptions and geopolitical tensions, remain a source of uncertainty for the outlook, particularly for food security and rural incomes.
Regional outlook and political risks
At a regional level, DTB projects that Uganda and Tanzania will outperform Kenya in economic growth in 2026. The bank cited a combination of political stability following recent elections and relatively stronger fiscal positions.
Uganda and Tanzania held general elections in October 2025 and January 2026 respectively, reducing political uncertainty in the two economies. In contrast, political activity in Kenya is expected to intensify ahead of the 2027 General Election, potentially weighing on investor sentiment and policy focus.
For the wider East African region, DTB identified key risks including reduced foreign aid flows, persistent fiscal pressures, a volatile global environment and emerging socio-political challenges.
Despite these risks, the bank said Kenya’s medium-term prospects remain positive if reforms are sustained and fiscal consolidation efforts are balanced with growth-supporting investments.
