Kenya's economy to grow at 5.2pc in 2024 amid mounting headwinds

An investment/economy change graph. [Getty Images]

The deceleration of growth of private consumption in 2023, mainly due to the imposition of higher interest rates aimed at curbing inflation will lead to a slowdown in the country’s economic activity this year, a new report says.

But according to Africa’s Pulse, a World Bank Group publication that analyses issues shaping Africa’s economic future, the trend should be reversed by 2024.

The report shows that Kenya’s economy will grow at five per cent this year, down from 5.2 per cent in 2021. The country’s Gross Domestic Product (GDP) will, however, expand at 5.2 per cent and 5.3 per cent in 2024 and 2025 respectively.

But even as private consumption takes a hit, with growth expected to decline to five per cent this year, investment growth “will show some resilience amid tighter financing conditions, growing by 7.7 per cent in 2023, up from seven per cent in 2022,” the report indicates.

In a poly-crisis environment, Kenya is one of the sub-Saharan countries that have shown “solid” and resilient growth in economic activity.

Ravaged by the Covid-19 pandemic, the effects of which were slowly receding last year, and facing challenges associated with the Russian invasion of Ukraine, the economy in 2022 further faced jitters that precede every general election, hampering investments.

But it has since coped remarkably well, the report shows. 

“In Kenya, growth of economic activity remained solid at 5.2 per cent in 2022, thanks to strengthened manufacturing, improved investor confidence supported by the credibility of the new administration’s plan to stabilise public finances and a more general improvement in risk appetite,” says the report.

“Economic activity in Kenya continues to pick up. Incoming data released on GDP show that the economy performed relatively well over the course of last year. Real GDP growth amounted to 4.7 per cent year-on-year in the third quarter of 2022, not far below the 5.2 per cent registered in the second quarter.”

Investor confidence

Last year, the economy’s performance, which was marginally better than many forecasts had shown, was driven by an increase in industry and services and supported by high private sector credit, improved investor confidence, high international prices for the country’s commodity exports (tea and coffee) and a recovery in tourism, according to the World Bank report.

“Investor confidence has continued to be buoyed by the new government’s plans to stabilise public finances, as well as the more general improvement in risk appetite. The whole economy PMI (Purchasing Managers’ Index) - economic indicators derived from monthly surveys of private sector companies) strengthened for a third consecutive month to 52 in January 2023.”

There has also been an increasing shortage of dollars, amid the shilling’s depreciation against the greenback, with the Central Bank of Kenya (CBK) indicative rate approaching Sh135 on Friday.

The Monetary Policy Committee (MPC) has increased the Central Bank Rate to 9.5 per cent as it tries to stem inflation, which is currently at 9.19 per cent.

Many countries in the sub-Saharan Africa region continue to struggle with rising inflation, forcing central banks to intervene.

Fuel prices

Rising food and fuel prices as well as the depreciation of the exchange rate are the main drivers of these inflationary pressures across countries in the region, the report shows.

Food inflation in Kenya, amid what was labelled the worst drought in four decades, was mainly responsible for pushing up headline inflation in the country and the region.

“The fight against inflation is far from over in sub-Saharan Africa: inflationary pressures remain stubbornly high and above target. Curbing inflation remains essential to boost people’s incomes and reduce uncertainty about consumption and investment plans,” the report notes.

“Some monetary policy committees have started to slow down the pace of the tightening cycle (South Africa) or put it on pause (Kenya, Mozambique, and Uganda) as inflation rates started to peak in late 2022.”

While things may look up next year for Kenya, with the economy expanding at 5.2 per cent, the country’s growth remains below the long-term average.

Of the countries polled in the reported survey, only Cape Verde and Seychelles could boast growth that exceeded expectations in 2022, which was above their long-term averages.

Interestingly, only Somalia and Angola showed positive cumulative variation in the exchange rates with world currencies from December 31, 2021, to February 23, 2023.

Some countries like Ghana had a negative cumulative variation of up to 50 per cent, indicating huge depreciations of their local currencies within the year.

Categorised as non-resource rich, Kenya will be hoping to gradually overcome some of the external factors that have suppressed its economy in the past couple of years by leveraging alternatives and focusing on its strengths.

These include improving its agricultural output and increasing, and diversifying, local manufacturing in a bid to achieve the goals set for 2024, 2025 and beyond.

“On the production side, growth in Kenya reflects strong increases in activity across all sectors in 2023 — with growth accelerating to 3.8 per cent in agriculture and 4.9 per cent in industry. Growth in services will remain resilient at 5.4 per cent in 2023, although down from 7.5 per cent in 2022,” the report shows.