The drought hitting the northern and eastern parts of Kenya could slow the country's 2006 economic performance, the Kenyan central bank has warned.
Farmers in affected areas are losing their animals
It also said the drought, which has left 2.5 million Kenyans - almost 10% of the population - facing the risk of starvation, also threatened inflation.
The bank estimates that Kenya's GDP grew by 5% in 2005. Predictions for GDP growth in 2006 are now as low as 4.5%.
Kenya's government still expects the economy to grow by 6% this year.
While the drought in northern and eastern Kenya has been caused by three years of falling rains, the situation could not be more different in western Kenya.
Kenya: 2.5m people
Farmers there recently enjoyed a bumper harvest.
"Sustained economic recovery... stands the risk of losing momentum due to ongoing drought particularly if the March-May 2006 long rains fail to occur as expected," the Kenyan central bank said in its latest monthly economic review.
While Kenya's finance minister David Mwiraria is sticking to the 6% growth prediction - pointing to the increased success of the tourism sector and successful privatisations - the country's President Mwai Kibaki has declared the drought to be a national disaster.
Earlier this week, the BBC reported that farmers in western Kenya were ignoring an order to sell their successful maize crop to the government to help the hungry in the drought-hit parts of the country.
Kenya has appealed for $150m (£85m) in foreign aid to help save the lives of people threatened by the famine.
The United Nations World Food Programme has warned that 11 million people across the Horn of Africa now need food aid.