The Kenyan economy is currently walking a tightrope between contraction and resilience. While the latest data signals a cooling in private sector momentum due to biting taxes, business captains are betting the house on a credit-fuelled recovery in 2026.

It is a classic economic paradox that is playing out in boardrooms across Nairobi. The headline Purchasing Managers’ Index (PMI)—the gold standard for gauging economic health—has dipped to 51.9 in January 2026 from a robust 53.7 in December. On paper, this signals that the rapid expansion witnessed late last year is losing steam, throttled by a cocktail of fiscal tightening and soaring input costs. Yet, beneath the bonnet of these sobering statistics lies a surprising engine of hope: an unshakeable optimism among firms that access to affordable credit is about to unlock a new era of productivity.

The Taxman Cometh

The slowdown is not a mystery; it is a direct consequence of policy. The Stanbic Bank Kenya PMI survey reveals that businesses are grappling with a marked rise in operating expenses. The culprits are familiar faces to any Kenyan entrepreneur: aggressive tax measures, increased import fees, and the spiralling costs of technology adoption. "We are seeing a squeeze that is forcing firms to absorb costs rather than pass them on," notes Christopher Legilisho, an economist at Standard Bank. This absorption strategy explains why inflation has eased slightly to 4.4%, but it is eating into margins and tempering the hiring spree that defined late 2025.

• Manufacturing Resilience: Despite the headwinds, the manufacturing sector remains the economy's backbone, recording the strongest gains in sales and output.
• Retail Slump: In stark contrast, the wholesale and retail sectors have seen demand contract, a worrying sign that the average mwananchi is tightening their belt.
• The Credit Lifeline: The silver lining is the banking sector. Firms report that improved access to loans is enabling them to stockpile inventory and invest in new product lines, anticipating a demand surge later in the year.

A Future Mortgaged on Hope?

The optimism holding the private sector together is fragile but palpable. Business leaders are not just looking at the current month's balance sheet; they are playing the long game. The belief is that the Central Bank's monetary policy easing will continue to trickle down, making capital cheaper and more accessible. However, this relies heavily on the assumption that the government's fiscal appetite will stabilize. If the tax burden continues to grow, the credit that businesses are currently relying on could quickly turn from a ladder into a noose.

As the first quarter of 2026 unfolds, the private sector finds itself in a period of transition. The exuberant growth of 2025 has been tempered by the reality of the cost of doing business. Yet, the sentiment on the ground is not one of despair, but of calculated risk. Kenyan businesses have weathered worse storms, and the current consensus is that if the credit taps remain open, growth will follow—slowly, perhaps, but surely.