The Central Bank of Kenya (CBK) has lowered its economic growth forecast for 2024, revising it down to 5.1% from the earlier projection of 5.4%. This adjustment comes in light of a slower-than-expected performance in the second quarter of the year, driven by a combination of domestic and global factors, including suppressed credit flows and challenges in key economic sectors.

Slower Second-Quarter Growth

According to the CBK, the Kenyan economy registered a 4.6% GDP growth rate in the second quarter of 2024, a decline from the 5.6% recorded during the same period last year. This slower pace marks the country’s weakest second-quarter growth since the COVID-19 pandemic, and the CBK has warned that the impact of ongoing challenges could further dampen the outlook for the remainder of the year.

CBK Governor Kamau Thugge, in a media briefing, cited the slowdown in private sector credit growth and external shocks as major contributors to the revised forecast. “The growth prospects for 2024 have been revised downwards to 5.1% from our previous projection of 5.4%, reflecting the outcomes of the slowdown seen in the second quarter and the slowdown in private sector credit to several key sectors,” Thugge said.

Sectoral Slowdowns Impact Growth

The slowdown in Kenya’s economic growth can be attributed to several key sectors that have underperformed. Agriculture, which is a significant contributor to the country’s GDP, recorded slower growth due to erratic weather patterns that affected crop yields. Additionally, sectors such as electricity and water supply, transport and storage, accommodation and food services, as well as finance and insurance, all registered reduced growth in the second quarter.

The construction, mining, and quarrying sectors experienced contraction, further pulling down overall economic performance. The services sector, which has traditionally anchored Kenya’s growth, is expected to expand by 6.2% in 2024, led by accommodation and food services. However, this expansion is not enough to offset the underperformance of other key sectors.

Manufacturing Sees Modest Growth

One of the few bright spots in the Kenyan economy has been the manufacturing sector, which recorded modest growth of 2.7% in 2024, up from 2% in 2023. The sector’s expansion has been driven by increased demand for locally produced goods, particularly in the food and beverage sub-sectors, as well as textiles. However, the overall contribution of manufacturing to the economy remains below pre-pandemic levels, and challenges such as high production costs and competition from imports continue to limit its potential.

Suppressed Private Sector Credit Growth

A significant factor contributing to the economic slowdown has been the collapse of private sector credit growth, which fell to just 1.3% in August 2024. The CBK had previously targeted stronger credit growth to stimulate economic activity, particularly in sectors such as manufacturing, trade, and real estate. However, tighter lending conditions, higher interest rates, and risk-averse behavior among banks have stifled credit access for many businesses, especially small and medium-sized enterprises (SMEs).

The lack of access to affordable credit has had a ripple effect on investment and consumer spending, both of which are crucial drivers of economic growth. The slowdown in credit growth has been most pronounced in sectors that rely heavily on financing, such as construction, which has experienced contraction in recent months.

External Risks and Geopolitical Concerns

In addition to domestic challenges, external risks are also weighing on Kenya’s growth prospects. The CBK has expressed concerns over the potential impact of worsening geopolitical conditions, particularly in key global markets. Ongoing conflicts, trade disruptions, and rising energy prices could negatively affect Kenya’s export sector, which relies heavily on agricultural products like tea, coffee, and horticulture.

Global inflationary pressures, fueled by rising oil prices and supply chain disruptions, have also led to increased costs for Kenyan businesses and consumers. The country’s import bill has ballooned in recent months, further straining the balance of payments. Kenya’s current account deficit remains a key area of concern for policymakers, as the country continues to rely on external borrowing to finance its development agenda.

Agriculture: A Mixed Performance

Agriculture remains a critical component of Kenya’s economy, contributing approximately 23% of GDP and employing over 40% of the population. In 2023, the sector rebounded strongly, growing by 6.5% after contracting by 1.5% in 2022. This recovery was driven by favorable weather conditions and improved agricultural practices, which boosted yields in key crops such as maize, tea, and horticultural products.

However, in 2024, the sector’s performance has been mixed. Erratic weather patterns, including prolonged dry spells in some regions and excessive rainfall in others, have affected planting and harvesting schedules. Additionally, input costs for fertilizers, seeds, and pesticides have risen sharply due to global supply chain disruptions, squeezing farmers’ profit margins.

Despite these challenges, the agricultural sector is expected to remain resilient, supported by government initiatives aimed at boosting food security and enhancing value addition in agri-processing. The government’s focus on increasing irrigation, expanding access to markets, and improving agricultural extension services is expected to yield long-term benefits for the sector.

Services Sector: A Key Driver of Growth

Kenya’s services sector has been a consistent driver of economic growth in recent years, and 2024 is no exception. The sector is expected to grow by 6.2%, with accommodation and food services leading the way. The recovery of the tourism industry, which was severely impacted by the pandemic, has been a major contributor to this growth.

Tourist arrivals have increased significantly in 2024, buoyed by improved global travel conditions and Kenya’s reputation as a top safari and beach destination. The sector has also benefited from increased investment in hotel infrastructure and the promotion of new tourist attractions, such as cultural heritage sites and eco-tourism initiatives.

In addition to tourism, other services such as information and communication technology (ICT), financial services, and professional services have also expanded, reflecting the growing importance of the services sector to Kenya’s overall economic performance.

Manufacturing and Industrialization: Opportunities and Challenges

While the manufacturing sector has shown some growth in 2024, it continues to face significant challenges. High production costs, particularly for energy and raw materials, have constrained the sector’s ability to compete with cheaper imports. Additionally, the ongoing global supply chain disruptions have affected the availability of key inputs, further hampering production.

The Kenyan government has prioritized industrialization as part of its long-term development strategy, and efforts are underway to boost the sector’s competitiveness. Initiatives such as the Special Economic Zones (SEZs), industrial parks, and incentives for local manufacturing are expected to attract both domestic and foreign investment.

However, for the sector to reach its full potential, it will require greater support in terms of infrastructure development, access to affordable financing, and measures to reduce the cost of doing business. The implementation of the African Continental Free Trade Area (AfCFTA) also presents opportunities for Kenyan manufacturers to expand their markets and tap into the growing demand for goods across the continent.

CBK’s Role in Stabilizing the Economy

As Kenya grapples with the challenges of slower economic growth, the CBK continues to play a critical role in stabilizing the economy through its monetary policy interventions. In recent months, the CBK has maintained a cautious stance on interest rates, balancing the need to contain inflation while supporting economic activity.

Governor Kamau Thugge has emphasized the importance of maintaining price stability while ensuring that credit flows to productive sectors of the economy. The CBK’s decision to lower its growth forecast reflects the bank’s commitment to transparency and its focus on managing risks to the economy.

Looking ahead, the CBK is expected to continue monitoring both domestic and external factors closely, adjusting its policies as necessary to support economic recovery and ensure financial stability.

Conclusion

Kenya’s economic outlook for 2024 has been tempered by a combination of domestic and external challenges, including slower growth in key sectors, suppressed private sector credit, and external risks. While the services sector and manufacturing offer some positive signs, the overall growth trajectory remains uncertain.

The CBK’s revised growth forecast of 5.1% reflects the realities of a challenging economic environment, but with ongoing efforts to address key issues such as credit access, infrastructure development, and sectoral reforms, there is potential for a stronger recovery in the coming years.

As the country navigates these challenges, a coordinated approach involving government, the private sector, and international partners will be crucial in driving sustainable economic growth and improving the livelihoods of Kenyans across the country.

Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

11th October, 2024