Economic Outline

Economic Indicators

Kenya has enjoyed a decade of strong economic growth, allowing the nation to access the status of a middle-income country. It has one of the fastest-growing economies in Sub-Saharan Africa, and growth was only partially affected by the Covid-19 pandemic, with GDP contracting by 0.3%. The country returned to its growth path in 2021 (7.5%) and in 2022 (4.8% as per the IMF estimates), accelerating to approximately 5% in 2023 thanks to a recovery in agriculture, following two consecutive years of output decline, along with the sustained strength and resilience of the services sector. However, manufacturing faced challenges due to rising production costs and increased input and borrowing costs. Business sentiment deteriorated due to various factors, including political tensions, a weakening currency, and a slowdown in the global economy. Consequently, industrial activity slowed, which in turn moderated growth in the services sector. The IMF forecasts real GDP to expand by approximately 5.3% in both 2024 and 2025, fueled partially by private sector investment and a rebound in private consumption.

Concerning public finances, Kenya's sovereign external financing requirement surged in the fiscal year ending June 2024 (FY24) to around USD 5.5 billion (5.4% of GDP), up from USD 2.6 billion in FY23 (2.8% of GDP), primarily due to increased principal repayment, including a USD 2 billion Eurobond repayment scheduled for June 2024. A weaker exchange rate, down approximately 4% against the US dollar in FY24 to date, exacerbates debt servicing challenges, with half of the government debt denominated in foreign currency. Fitch anticipates the government will fulfill its financing obligations in FY24 through a blend of official lending and commercial borrowing. External funding constraints have elevated the government's dependence on domestic financing, driving up interest costs. The government's budget deficit contracted to 5.6% of GDP in FY23 from 6.2% in FY22. Despite persistent spending pressures and legal hurdles to revenue reform efforts, the government aims to sustain fiscal consolidation in FY24, with Fitch projecting a budget deficit of 5.2% of GDP, followed by 4.4% in FY25 as revenue reforms gather momentum through tax and non-tax measures, accompanied by marginal spending reductions. Persistent revenue collection underperformance and significant spending pressures have led to a rise in government debt in recent years, with the debt-to-GDP ratio increasing to 71.8% in FY23 from 67.6% one year earlier. By the end of FY23, nearly half of the public debt was denominated in foreign currency, exposing it to currency risk. The government debt is expected to climb further in FY24 to 73.8% of GDP, partly attributed to currency depreciation. However, there's an expectation for a slight decline in FY25 as revenue reforms take effect and GDP growth remains robust (Fitch Ratings). The slowdown in food prices, coupled with the Central Bank of Kenya's (CBK) policy rate hike of 175 basis points in June 2023, aided in bringing the inflation rate within CBK's target range by July 2023. However, as of November 2023, inflation remains high at 6.8%, towards the upper limit of CBK's target range. This is partly attributed to increased electricity tariffs and the implementation of a 16% VAT on petroleum products. In December 2023, CBK further raised the policy rate by 200 basis points to 12.5% (World Bank).

The unemployment rate was estimated at 5.6% in 2022 (World Bank). Kenya’s total workforce is projected to increase by 40.6% to 40.4 million by 2035; as data from the Kenya National Bureau of Statistics (KNBS) indicate the country will add 11.7 million to the job market by 2035, this may cause mounting unemployment in an economy that is not generating adequate jobs for school leavers and college graduates. Overall, the country’s GDP per capita (PPP) was estimated at USD 5,765 in 2022 by the World Bank. The poverty ratio stands at 38.6%, above the pre-pandemic level as poor and rural households have not participated as much in Kenya’s economic recovery. The recent deceleration in poverty reduction, coupled with unequal access to education and other opportunities, weak job creation, and consistently low productivity growth, underscores the necessity for an inclusive growth strategy. Such a strategy aims to foster broader income growth and enhance purchasing power across society.

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