Kenya

Robust growth despite monetary and fiscal tightening

Growth will remain strong in 2024. It will be driven by a robust services sector (55% of GDP), including flourishing tourism, which has already exceeded its pre-pandemic level (10.4% of GDP in 2022). In addition, the agricultural sector (19% of GDP), which is crucial as it contributes the bulk of exports and accounts for two-thirds of jobs, will remain buoyant given the persistence of El Niño, which generally brings wetter weather to East Africa. On the other hand, growth will be limited by the combined impact of monetary tightening and fiscal consolidation. Private investment will, however, benefit from the emphasis placed on public-private partnership projects. In addition, a project to privatise 35 public companies is under way, which could initially involve the Kenya Pipeline Company, which manages the country's oil and gas pipelines. Consumption (88.7% of GDP in 2022) will remain resilient thanks to falling inflation, gains from the agricultural sector and a surge in expatriate remittances.

To combat inflation and stem the depreciation of the shilling, the Central Bank of Kenya (CBK) is continuing its monetary tightening policy. It had already raised its key rate by a cumulative 375 basis points in 2023 and announced a further 50bp increase in February 2024, taking it to 13%. Inflation is expected to ease in 2024, due to a deceleration in food prices and a slowdown in depreciation (-20% against the dollar), thanks to the action of the CBK and the support of the IMF and the World Bank. In January 2024, the IMF approved a third increase in the programme with Kenya, bringing its total financing under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) to USD 4.4 billion for the 2021-2025 period.

Twin deficits and high debt

The budget deficit should continue to narrow in 2024. Kenya will continue its fiscal consolidation under the IMF programme. The government is mainly planning measures to boost revenue (18% of GDP), such as a doubling of VAT on fuel and an income tax increase for the upper brackets. The privatisation of companies could also be an additional source of revenue. The deficit will be financed by domestic borrowing (issuance of Treasury bills) as well as by external financing – mainly concessional – notably from the IMF and the World Bank. According to the IMF, Kenya’s public debt, half of which is external and which accounts for 44% of revenues, is nearing over-indebtedness. The two main holders of the country’s external public debt are the World Bank and China, which respectively hold 28% and 18%, while onerous commercial loans account for 22%. However, it is expected to become sustainable as a result of the ongoing fiscal consolidation effort. Exchange rate depreciation represents a risk for public debt as half of it is denominated in foreign currencies.

The current account will remain in deficit in 2024 due to the substantial trade deficit (9.3% of GDP, half of which is energy-related). Despite the robustness of the agricultural sector, export growth will barely offset the upturn in imports prompted by the economic boom and limited shilling depreciation. The balance of services is barely in surplus despite income from tourism (1.1% of GDP in 2023). Interest payments on debt (3% of GDP) will be more than offset by expatriate remittances ( expected to be over 4% of GDP). The latter mainly come from North America (58% in 2023), particularly the US. Given the country's foreign exchange reserves (equivalent to 4 months' imports at the end of 2023) and limited FDI (0.7% of GDP), financing requirements will be covered by borrowing (mainly concessional, but also commercial). In February 2024, Kenya issued a 7-year USD 1.5 billion eurobond at 10.375% to buy back part of the USD 2 billion eurobond maturing in June 2024.

Political fragility and deepening external relations

President William Ruto's Kwanza coalition, elected for a 5-year term in 2022, holds 179 of the 349 seats in the National Assembly and 33 of the 67 seats in the Senate. Its talks with the Azimio opposition coalition led by Raila Odinga, the loser of the last presidential election, as part of the National Dialogue Committee, resulted in a bipartisan report that was adopted unanimously by the Assembly. The adoption of this report has eased tensions, but implementing the proposed political reforms (creation of an official role for the leader of the opposition) and institutional reforms (return of the post of Prime Minister, reform of the electoral process) will be difficult and renewed demonstrations cannot be ruled out.

Internationally, while instability in Somalia, the Democratic Republic of Congo and Sudan will weigh on trade, the end of the civil war in Ethiopia heralds business opportunities. Mr Ruto is also keen to extend ties with multilateral and bilateral partners, in particular the US and the European Union. Talks have been under way with Washington since April 2023 for a trade and investment partnership (STIP), while an economic partnership agreement with the EU was approved in February 2024.

Last updated: March 2024