Kenya’s Economy is Recovering from the Polycrisis, But Challenges Remain
The growth momentum was driven by the service sector which contributed about 80 percent of the increase in total GDP
Fiscal consolidation plays a central role in supporting Kenya’s macroeconomic foundations for inclusive and sustained growth
With a GDP growth at 4.8 percent in 2022, economic performance softened after the strong rebound from the COVID-19 crisis at 7.5 percent in 2021. The growth rate, however, has remained in line with Kenya’s long-term growth trajectory, even though the economy faced challenging global financial conditions, fuel, and food price shocks coupled with the elections, and a historic drought that affected the economy, especially in the second half of 2022.
The growth momentum was driven by the service sector which contributed about 80 percent of the increase in total GDP. Financial services, tourism, and transport sectors performed especially strongly. According to the latest Kenya Economic Update (KEU), Kenya’s GDP growth outpaced that of Sub-Saharan Africa which is estimated to have grown at 3.6 percent in 2022.
The strong headline GDP growth amid the poly-crisis highlights the resilience of the Kenyan economy. Like many countries across the world, Kenya faced inflationary pressures amid commodity price volatility, tightening global financing conditions that put major pressure on the exchange rate and foreign exchange reserves, further aggravated by the worst drought in four decades, significantly increasing food insecurity and affecting millions of livelihoods. Macroeconomic policy aimed at striking a balance in a complicated economic environment through a combination of greater exchange rate flexibility, fiscal consolidation, and a tighter monetary policy. Fiscal consolidation, that Kenya embarked on in recent years to address mounting debt sustainability challenges and which was interrupted by the pandemic, continued in 2022 helping to reduce external and domestic imbalances.
“Fiscal consolidation plays a central role in supporting Kenya’s macroeconomic foundations for inclusive and sustained growth," said Keith Hansen, World Bank Country Director.
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 percent, broadly in line with the pre-pandemic trend and Kenya’s estimated potential GDP growth rate. Real per capita incomes are expected to grow at around 3 percent in the medium term, and poverty is expected to resume its pre-pandemic downward trend.
“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.
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. Domestic risks are mostly linked to spending pressures to reduce the high cost of living and a slowdown in tax efforts.
While climate change is recognized as a major threat to Kenya’s growth profile, global efforts to address climate change, especially reducing greenhouse gas emissions, also offer positive opportunities for the Kenyan economy. The Special Focus section of this KEU looks at the opportunities for Kenya in a decarbonizing world. If Kenya maintains a low-carbon development path as it grows, it could seize opportunities created by the global trend to decarbonize economies. Maintaining a low-carbon path does not have to be at the expense of Kenya's efforts to accelerate growth if the path is aligned with boosting productivity and supporting inclusive development.
Distributed by APO Group on behalf of The World Bank Group.