(Bloomberg) -- Fuel subsidies are hurting Kenya’s revenue recovery, the World Bank said as it forecast the nation’s economic growth will slow this year partly because of increased commodity prices.

East Africa’s largest economy will probably expand by 5.5%, compared with 7.5% last year, the World Bank said in it’s Kenya Economic Update published on Tuesday. Growth may further slow in the following period, according to the lender.

The new forecast, an upgrade from 4.9% previously, takes into account a stronger-than-expected recovery from the coronavirus pandemic last year, according to the report. The outlook would have been better but has been weighed on by increases in the prices of fuel, fertilizer and wheat because of Russia’s invasion of Ukraine.

“Offsetting the strong economic momentum generated by the pandemic recovery is the impact of the war in Ukraine,” according to the World Bank report. It has “clouded the outlook for the global economic recovery.” 

The government is spending about $66 million monthly on fuel subsidies, which is exerting fiscal pressure and curbing a revenue recovery that had gathered momentum following a rebound in economic activities last year.

“A strong recovery in revenues has supported fiscal performance but this is now being countered by the cost of subsidizing fuel,” according to the report. “The limited passthrough of higher international oil prices to consumers is generating fiscal costs.”

Kenya is vulnerable to the impact of Russia’s war on commodities. That’s despite moderate exposure to Russia and Ukraine, given trade with both countries was around 2.1% in the five years through 2020.

Kenya’s deteriorating outlook is exacerbated by a prolonged drought and a slowdown in investment because of general elections set for Aug. 9.

The “worsening” drought is having a “devastating effect on food security and livelihoods in affected parts of the country and is necessitating increased social spending on food assistance,” according to the report.

Public debt is projected to decline to 64.9% of gross domestic product in 2023-24, compared with an estimate of 68% of GDP in the year through June, according to the lender. That will be if the economy expands at a favorable rate and borrowing costs reduce.

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