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IMF Cuts Kenya's 2025 Economic Growth Forecast Amidst Rising Debt and Economic Uncertainty

The International Monetary Fund (IMF) has revised down Kenya’s economic growth forecast for 2024 and 2025, reflecting deepening fiscal challenges and persistent headwinds affecting the broader Sub-Saharan African region. The latest projections from the IMF’s World Economic Outlook (WEO) indicate that Kenya’s GDP will grow by just 5.0 percent in both 2024 and 2025, nearly a one-percentage-point downgrade from earlier estimates. This reduction marks the largest forecast adjustment for a major East African economy in less than a year.

This revision underscores the increasing pressure Kenya faces due to rising debt levels, persistent inflation, and structural weaknesses in key economic sectors. The IMF’s move comes as the Kenyan economy struggles to regain momentum amid global and domestic challenges, leaving government officials and economists concerned about the future trajectory of the country’s economic growth.

Subdued Growth and Regional Concerns

In a press briefing held at the IMF’s headquarters in Washington, D.C., Pierre-Olivier Gourinchas, the IMF’s chief economist, explained that Kenya’s growth outlook mirrors the broader slowdown in Sub-Saharan Africa. “Growth remains subdued and somewhat uneven in Sub-Saharan Africa,” Gourinchas noted, stressing that high debt-service burdens continue to weigh heavily on the region’s economic prospects.

Sub-Saharan Africa’s economic outlook, in general, has been revised downward by the IMF as well. The continent, which is grappling with issues such as declining commodity prices, rising inflation, and mounting debt, is projected to grow by just 3.4 percent in 2024, down from 3.9 percent in earlier forecasts. This sluggish growth highlights the challenges faced by several African economies, including Kenya, in achieving sustainable recovery.

Kenya’s GDP growth forecast for 2025 had initially been estimated at 6 percent, positioning the country as one of the stronger performers in East Africa. However, as global economic conditions worsen and domestic fiscal pressures intensify, the latest outlook now signals that Kenya could be heading into a period of slower economic expansion. This lower growth could undermine the government’s plans to create jobs, reduce poverty, and spur infrastructure development, all of which are essential components of President William Ruto’s economic agenda.

Central Bank of Kenya Lowers Forecast Amid Sectoral Slowdown

Earlier this month, the Central Bank of Kenya (CBK) also revised its 2024 growth forecast downwards, lowering it to 5.1 percent from the initial estimate of 5.4 percent. In a press conference held on October 9, CBK Governor Kamau Thugge pointed to worrying trends across key sectors of the economy, such as construction, mining, and quarrying, as contributors to the weaker outlook. The deceleration in these sectors, traditionally seen as drivers of Kenya’s GDP, presents significant challenges to the country’s overall economic stability.

Thugge stressed that a further slowdown in these sectors could have profound ripple effects, particularly in urban areas where construction activities contribute significantly to job creation and economic activity. The stalling of large infrastructure projects and the stagnation in housing construction have already led to layoffs and delayed investment decisions, intensifying concerns over unemployment and poverty reduction.

In the mining and quarrying sectors, which have seen considerable foreign direct investment (FDI) in recent years, output has been constrained by regulatory hurdles, environmental concerns, and the global slowdown in demand for raw materials. As global commodity prices continue to fluctuate, the uncertainty surrounding these sectors only deepens, further exacerbating Kenya’s economic vulnerabilities.

Rising Debt and Inflation: Double Trouble for Kenya

Kenya’s mounting debt burden has been a growing concern for economists and policymakers alike. The country’s debt-to-GDP ratio now stands at over 70 percent, significantly above the recommended threshold of 50 percent for developing economies. Servicing this debt consumes a large portion of government revenue, leaving little room for public investment in critical areas such as healthcare, education, and infrastructure development.

Kenya’s external debt, which includes borrowing from multilateral institutions like the IMF and World Bank as well as bilateral partners like China, has been accumulating rapidly over the past decade. In 2023, Kenya’s debt servicing costs surpassed KSh 1 trillion (approximately USD 6.8 billion), straining public finances. As a result, Kenya has been forced to seek additional loans and engage in debt restructuring negotiations to meet its financial obligations.

Meanwhile, inflationary pressures continue to weigh heavily on Kenyan households. The Kenya National Bureau of Statistics (KNBS) reported that inflation stood at 6.9 percent in September 2024, driven primarily by higher food and fuel prices. The ongoing war in Ukraine has disrupted global supply chains, pushing up the cost of imported goods, while climate-related shocks such as droughts have reduced agricultural output, leading to food shortages and price hikes.

The combined effects of high inflation and rising debt have placed considerable strain on Kenya’s economy, leading to public dissatisfaction and growing calls for reforms. The government’s austerity measures, including tax hikes and subsidy cuts, have been unpopular, particularly among the country’s growing youth population.

Generation Z Protests and Economic Discontent

Kenya’s younger population, particularly Generation Z, has been vocal in expressing their frustrations over the lack of job opportunities and the rising cost of living. This demographic, which accounts for a significant portion of the country’s population, is increasingly disillusioned by the government’s inability to address their economic grievances. Many have turned to social media to organize protests and advocate for better employment opportunities and improved living standards.

The current economic trajectory, characterized by sluggish growth and limited job creation, threatens to exacerbate social discontent. Analysts warn that if the government fails to meet the expectations of its youth, Kenya could see a rise in social unrest, similar to the protests witnessed in other African countries like Nigeria and South Africa. The World Bank has already highlighted the potential for increased political instability in Kenya if unemployment continues to rise and living conditions deteriorate.

Tightening Credit Environment Stifles Growth

Adding to the grim economic outlook is a tightening credit environment. Despite the Central Bank of Kenya’s efforts to lower the Central Bank Rate (CBR) to encourage borrowing, commercial banks remain hesitant to extend credit to businesses and households. The CBK cut the CBR to 8.5 percent in August 2024, down from 9.5 percent, in a bid to stimulate economic activity. However, banks have cited rising costs, deteriorating loan quality, and increased default rates as reasons for their reluctance to lend.

This tightening of credit has significant implications for Kenya’s economic recovery. Access to affordable credit is crucial for businesses, particularly small and medium-sized enterprises (SMEs), which account for more than 80 percent of employment in Kenya. Without sufficient access to credit, these businesses may struggle to expand, invest in new technologies, or hire additional workers, further slowing down economic growth.

Impact on Government Policies and the Road Ahead

The IMF’s downgraded forecast and Kenya’s broader economic challenges could have profound implications for the government’s fiscal policies. President William Ruto’s administration has prioritized job creation, poverty reduction, and infrastructure development, but achieving these goals will require careful management of the country’s debt and a more robust approach to addressing structural weaknesses in the economy.

The government has already taken steps to reduce its budget deficit by increasing tax revenues and cutting spending. However, these measures have been met with resistance from both businesses and the general public. In particular, the introduction of new taxes on fuel and mobile money transactions has been controversial, with critics arguing that such taxes disproportionately affect low-income households.

Moving forward, Kenya will need to strike a delicate balance between implementing necessary austerity measures and maintaining public support. The government’s ability to navigate this challenging economic landscape will be crucial in determining the country’s long-term growth prospects.

Conclusion: Uncertain Economic Outlook

The IMF’s revised economic growth forecast for Kenya paints a sobering picture of the country’s economic future. While Kenya remains one of the largest and most diversified economies in East Africa, the challenges posed by rising debt, inflation, and sectoral slowdowns are significant. Addressing these issues will require bold policy decisions, increased investment in key sectors, and a renewed focus on job creation.

As Kenya moves into 2025, the country faces an uncertain economic outlook. Whether the government can implement the necessary reforms to boost growth and improve living standards will be key to ensuring that Kenya’s economic recovery remains on track.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

24th October, 2024

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