Kenya’s economy tipped to grow by 5pc this year

Thursday, June 8th, 2023 10:30 | By
State will cause ‘market distortions’ with rate cap
Treasury CS Njuguna Ndung’u. PHOTO/Courtesy

World Bank has projected that Kenya’s real gross domestic product (GDP) will increase by 5 per cent in 2023 and maintain an average growth rate of 5.2 per cent in the years 2024 and 2025.

The Bretton Woods insitution which paints a grossy picture of Kenya’s growth prospects says the country will recover from multiple shocks, driven by a strong revival in the agriculture sector.

“Kenya’s medium-term growth outlook remains strong as the economy continues to recover from the multiple crises. GDP growth over the medium term is expected to remain at around 5 per cent,” the World Bank said. The recently launched Kenya Economic Update by the World Bank praised the government’s efforts in revenue collection, noting that it remained stable during the first nine months of the fiscal year 2022/23.

Stability in revenue generation is a positive sign for the country’s economic recovery. The bank says Kenya’s path of fiscal consolidation will help reduce government appetite for borrowing leaving room for the private sector to thrive.

“The strong GDP growth in the medium term is projected to benefit from reduced crowding out by the government because of fiscal consolidation and will be driven by robust private investment,” said Naomi Mathenge, World Bank Kenya Senior Economist.

Following two years of debilitating drought, many farming areas have experienced adequate rainfall in recent months. This improved weather pattern is expected to boost agricultural production and alleviate inflationary pressures.

The World Bank report highlights the importance of a strong agricultural sector, as climate change poses a significant risk to Kenya’s economy, estimating potential socio-economic losses of between three and five per cent of GDP annually.

The outlook, however, is subject to elevated risks. External risks include weaker than anticipated growth in Europe, elevated global commodity prices that can increase Kenya’s import bill and increase the cost of reducing inflation, and further tightening of financial conditions in advanced economies.

Spending pressures

“Domestic risks are mostly linked to spending pressures to reduce the high cost of living and a slowdown in tax efforts,” the report says.

To address inflation and currency depreciation, the Central Bank of Kenya has been implementing a tightening monetary policy. Since May 2022, the policy rate has been raised by a cumulative 250 basis points to reach 9.5 per cent. These measures aim to curb inflationary pressures and stabilise the national currency.

However, sluggish global economic conditions and persistent high inflation continue to impact the economic activity in the region. Sub-Saharan African growth for 2023 is projected to further decelerate to 3.1 per cent. The manufacturing sector experienced a slowdown in 2022, primarily due to setbacks in crop and livestock output, which adversely affected industries such as grains milling, dairy, and animal and vegetable oils.

The agriculture sector in Kenya contracted by 1.6 per cent year-on-year in 2022 due to prolonged dry weather conditions and a significant increase in input prices. However, the sector’s recovery is expected to contribute to overall economic growth. “The climate shock of the last two years has been a major drag on Kenya’s economic growth, with growth in real GDP excluding agriculture standing at 6.3 percent in 2022,” World Bank said.

In contrast, the tourism industry has shown a robust recovery, reflected in a significant increase in activities within the hotels and restaurants as well as the transport subsectors. This resurgence in tourism is a positive sign for the country’s economic recovery.

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