Kenya’s external financial position deteriorated sharply in the third quarter of 2025, with the current account deficit expanding more than threefold to reach Sh135.3 billion—a three-year high that underscores mounting pressures on the country’s balance of payments and signals intensifying challenges for policymakers attempting to maintain macroeconomic stability amid robust economic growth. The widening deficit, reported by the Kenya National Bureau of Statistics in its latest quarterly GDP and Balance of Payments report, represents a dramatic increase from the Sh43.5 billion deficit recorded during the same period in 2024, reflecting structural vulnerabilities in Kenya’s trade position and the escalating costs of servicing the nation’s growing external debt obligations.
The deterioration in Kenya’s external accounts occurred paradoxically alongside the economy’s strongest quarterly performance in recent years, with GDP expanding 4.9% in the third quarter compared to 4.2% a year earlier. This growth was driven by rebounds in construction, which surged 6.7% after contracting 2.6% the previous year, and mining and quarrying, which recovered 16.6% from a 12.2% contraction. The disconnect between robust domestic economic expansion and weakening external balances highlights the challenge facing Kenya’s economy: sustaining growth momentum while managing the foreign currency implications of increased imports, particularly capital goods needed to support that very expansion.
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Merchandise Trade Deficit Expands Amid Surging Import Bill
The primary driver of the widening current account deficit was the expanding merchandise trade gap, which grew from Sh321.1 billion in the third quarter of 2024 to Sh355.8 billion in the corresponding period of 2025. This expansion reflected a fundamental imbalance in trade flows: while Kenya’s total exports increased by Sh48.0 billion during the period, imports surged by a much larger Sh82.7 billion, pushing the trade deficit wider and placing additional pressure on foreign exchange reserves.
The composition of Kenya’s import bill reveals the structural nature of these pressures. According to KNBS data, the higher import expenditure was predominantly driven by capital and intermediate goods rather than consumer products, with industrial machinery imports nearly doubling during the quarter. “The higher import bill was mainly attributed to increased imports of industrial machinery, iron and steel, and road motor vehicles. Imports of industrial machinery jumped by nearly 95 per cent, while iron and steel imports rose 41 per cent, and road motor vehicles by 29.1 per cent during the quarter,” KNBS reported.
These import categories directly reflect Kenya’s ongoing infrastructure development and construction recovery. The surge in cement consumption, which increased 16.2% to 2,664.1 thousand tonnes during the quarter, necessitated increased imports of iron and steel for construction projects. Similarly, iron and steel imports rose to 336,262 tonnes from 220,284.6 tonnes a year earlier, supporting both construction activity and manufacturing expansion. The 29.1% increase in road motor vehicle imports reflects both consumer demand recovery and fleet expansion by businesses capitalizing on improved economic conditions.
Importantly, Kenya did record some relief in certain import categories. The data shows lower import expenditure on petroleum products, medicinal and pharmaceutical products, wheat, and chemical fertilizers during the quarter. These reductions provided partial offset to the overall surge but were insufficient to prevent the trade deficit from widening significantly. The decline in petroleum imports likely reflected both moderation in global oil prices during portions of the quarter and continued efforts to improve energy self-sufficiency through increased geothermal and hydroelectric power generation.
Export Performance: Modest Growth Driven by Africa and Floriculture
Despite the widening trade deficit, Kenya’s export performance showed resilience in certain sectors, with total export earnings rising modestly to Sh289.4 billion, representing a 2.5% increase compared to the third quarter of 2024. Domestic exports, which exclude re-exports of goods simply passing through Kenya’s ports, increased by 1.2% during the quarter, primarily supported by strong performances in animal and vegetable oils and the country’s crucial floriculture sector.
The floriculture sector, which has long been a pillar of Kenya’s export economy, demonstrated particular strength during the quarter. Cut flower exports increased by 36.2% to 31,277 tonnes from 22,960.7 tonnes in the third quarter of 2024, translating to an 11.6% increase in export value. This performance reflects both increased production volumes and sustained demand from European markets, particularly the Netherlands, which remains the primary destination for Kenyan flowers. The sector’s strong showing also benefited from improved weather conditions that supported higher yields and better quality blooms during the quarter.
Animal and vegetable oils emerged as another bright spot, with export values jumping 24.3% during the quarter. Articles of apparel and clothing accessories, along with edible products and preparations, also recorded notable increases, reflecting Kenya’s gradual diversification beyond traditional agricultural commodities toward higher-value manufactured and processed goods.
Regionally, African markets remained Kenya’s largest export destination, accounting for 44.6% of total export earnings after posting a robust 15.3% increase during the quarter. This performance was primarily driven by increased exports to the Democratic Republic of Congo (up 57.5%), Uganda (up 34.5%), Egypt (up 31.1%), and Rwanda (up 10.9%). The gains were supported by higher re-exports of kerosene-type jet fuel to DRC, domestic exports of potatoes, and re-exports of gas oil, demonstrating Kenya’s role as a regional trade hub for East and Central Africa.
Exports to Europe also rose, climbing 5.2% to Sh60.8 billion during the quarter, driven mainly by increased shipments to the Netherlands (up 14.2%) for cut flowers and macadamia nuts. However, this growth was partially offset by significant contractions in other major markets. Export earnings from Asia contracted by 14.2% to Sh68.0 billion, reflecting lower shipments to the United Arab Emirates (down 43.5%), India (down 52.8%), Pakistan (down 13.1%), and Yemen (down 86.0%). Similarly, earnings from the Americas declined from Sh26.2 billion in Q3 2024 to Sh24.4 billion in Q3 2025, largely due to reduced coffee exports to the United States.
Services Account Surplus Shrinks Amid Rising Outbound Travel
Beyond trade in goods, Kenya’s services account surplus experienced a significant contraction, declining from Sh100.6 billion in the third quarter of 2024 to Sh57.2 billion in 2025—a reduction that contributed substantially to the overall current account deterioration. The drop reflected reduced net inflows from travel, transport, and government goods and services, categories that have historically provided crucial buffers against Kenya’s merchandise trade deficit.
While tourism receipts remained substantial during the quarter, with international visitor arrivals through Jomo Kenyatta International Airport and Mombasa airport increasing 9.9% to 578,234 passengers from 526,170 passengers a year earlier, higher outbound travel and service payments narrowed the net surplus. The accommodation and food services sector grew 17.7% during the quarter, largely due to Kenya co-hosting the African Nations Championship (CHAN), which helped drive increased visitor arrivals and hotel occupancy.
However, the benefits of increased inbound tourism were partially offset by rising outbound travel by Kenyan residents, reflecting growing middle-class prosperity and increased business travel as economic activity accelerated. Service payments for international transport, professional services, and technology also increased as businesses expanded operations and invested in imported expertise and intellectual property.
The primary income deficit, which captures investment income flows including interest payments on external debt and profit repatriation by foreign companies operating in Kenya, narrowed slightly to Sh76.5 billion. While this represented a modest improvement supported by higher income receipts, continued outflows in the form of interest payments on Kenya’s substantial external debt and profit repatriation by multinational corporations kept the account in negative territory.
Diaspora Remittances: A Bright Spot Amid External Pressures
The secondary income surplus, dominated by diaspora remittances, provided crucial support to Kenya’s external position despite declining to Sh239.8 billion during the quarter. Remittances inched up marginally to Sh165.5 billion during the third quarter, maintaining their position as one of Kenya’s most reliable sources of foreign exchange.
The resilience of diaspora remittances represents a critical stabilizing force for Kenya’s balance of payments. According to Prime Cabinet Secretary Musalia Mudavadi, Kenya’s diaspora remittances reached a historic milestone of Ksh1 trillion by November 2025, surpassing earnings from some of Kenya’s traditional exports such as tea and horticulture. The United States accounts for 50-55% of total remittances, with monthly inflows now regularly exceeding $400 million (Ksh51.7 billion).
These remittances provide essential financial support to households across Kenya, funding education, healthcare, and daily living expenses while also contributing to investment in real estate, small businesses, and agricultural improvements. The achievement was driven in part by a rise in the number of Kenyans working abroad, with 430,000 Kenyans gaining employment overseas through Bilateral Labour Agreements since 2023, as well as increased access to digital jobs facilitated through initiatives such as the Ajira Digital Programme.
The Central Bank of Kenya projects that diaspora remittances will exceed $5 billion for the full year 2025, highlighting the increasing contribution of the diaspora to Kenya’s economy and providing a crucial buffer against the widening current account deficit. However, economists note that while remittances support household consumption and provide foreign exchange, they do not directly address the structural trade imbalances that are driving the current account deterioration.
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External Financing Weakens as Debt Servicing Costs Rise
Kenya’s external financing position deteriorated sharply during the quarter, compounding the pressures from the widening current account deficit. Net external financing fell by 57.8% to Sh25.7 billion as debt servicing costs rose and capital inflows declined, creating a challenging environment for maintaining adequate foreign exchange reserves.
The contraction in external financing reflects multiple factors. First, global financial market volatility and rising interest rates have made debt management increasingly complex and costly for Kenya. Second, non-resident holdings of Treasury bonds declined to Sh298.8 billion by the end of September 2025 from Sh349.4 billion a year earlier, reflecting reduced foreign appetite for domestic debt securities amid global monetary tightening and concerns about emerging market risk.
This reduced foreign investor participation in Kenya’s domestic debt market, while potentially concerning from a financing perspective, does reduce exposure to sudden capital flight and exchange rate pressures that can occur when foreign investors rapidly exit local bond markets. However, it also means the government must rely more heavily on domestic investors to finance budget deficits, potentially crowding out private sector credit access.
The financing pressures prompted a Sh63.7 billion drawdown in foreign exchange reserves during the quarter, compared to a reserve build-up during the same period last year. This drawdown signals increased pressure from external obligations and the need to use accumulated reserves to smooth temporary financing gaps and support the shilling’s value against major currencies.
External Debt Stock Rises to Sh5.62 Trillion on New Bond Issuances
The stock of external debt liabilities of the general government rose to Sh5.62 trillion by the end of September 2025, up from Sh5.43 trillion a year earlier—a 3.4% increase that reflects Kenya’s continued reliance on external borrowing to finance development projects and budget deficits. The increase was driven mainly by a 19.9% rise in international sovereign bonds following new issuances in March and June 2025, as Kenya returned to international capital markets to refinance maturing obligations and raise additional funds.
“The increase in the stock of external debt liabilities was majorly attributable to a 19.9 per cent increase in the stock of International Sovereign Bond following issuance of these debt securities in March and June 2025,” KNBS explained in its report. These bond issuances allowed Kenya to access capital markets at a time when global financial conditions, while tighter than in previous years, remained accessible for creditworthy emerging markets.
The composition of Kenya’s external debt reveals important structural characteristics. Multilateral loans continued to dominate Kenya’s external debt portfolio, accounting for 76.4% of total external liabilities at Sh4.29 trillion. Within this category, loans from multilateral lenders rose by 7.4% to Sh3.06 trillion, underscoring the government’s sustained engagement with institutions such as the World Bank and the African Development Bank, which provide concessional financing at rates significantly below commercial market terms.
In contrast, debt owed to bilateral lenders and commercial banks declined during the period. Stock of debt from bilateral sources fell by 5.7% to Sh996.5 billion, while commercial bank debt dropped sharply by 28.3% to Sh223.8 billion—a reduction attributed to a debt restructuring exercise undertaken in July 2025. This restructuring, which involved negotiating extended maturities and more favorable terms with certain creditors, represents part of Kenya’s broader debt management strategy aimed at reducing refinancing risks and lowering the overall cost of borrowing.
The evolution of Kenya’s debt portfolio reflects deliberate policy choices. According to Cabinet Secretary John Mbadi, Kenya’s 2025 Medium-Term Debt Strategy targets a borrowing mix of 25% from external sources and 75% from domestic markets, with the plan aiming to reduce the debt-to-GDP ratio from 63.7% to 57.8% and lower the present value of debt to GDP from 58.1% to 52.8% by 2028. As of June 2025, Kenya’s total public debt stood at Sh11.81 trillion, representing 67.8% of GDP, with external debt accounting for Sh5.48 trillion and domestic debt reaching Sh6.33 trillion.
Currency Movements and Monetary Policy Response
The external pressures manifested in currency movements during the quarter, with the Kenyan shilling experiencing mixed performance against major trading currencies. According to KNBS, the shilling appreciated by 0.2% against the U.S. dollar during the third quarter, reflecting the Central Bank of Kenya’s active management of exchange rate volatility and the support provided by diaspora remittances and improved export performance in certain sectors.
However, the shilling weakened significantly against other major currencies, depreciating by 6.2% against the Euro, 3.6% against the Pound Sterling, 1.6% against the South African Rand, and 0.7% against the Japanese Yen. These movements reflected both the relative strength of these currencies globally and Kenya’s structural trade imbalances with Europe and other regions. Regionally, however, the shilling strengthened against the Tanzanian and Ugandan shillings by 5.8% and 4.1% respectively, supporting Kenya’s competitive position in East African trade.
The Central Bank of Kenya’s monetary policy during the quarter focused on supporting economic growth while maintaining price stability. The Central Bank Rate was lowered from 12.75% in September 2024 to 9.50% by September 2025—a substantial reduction of 325 basis points aimed at stimulating lending and reducing the cost of capital for businesses. As a result, average commercial bank loan rates declined to 15.07% from 16.91%, easing financing conditions for the private sector.
This monetary policy easing occurred against a backdrop of moderating inflation, which averaged 4.42% in the third quarter of 2025, up only slightly from 4.08% in Q3 2024. The relatively contained inflationary pressures, driven largely by food and non-alcoholic beverage prices, provided the CBK with space to prioritize growth support over inflation containment. Treasury bill rates also declined substantially, with the 91-day rate falling to 7.96%, the 182-day rate dropping to 9.1%, and the 364-day rate declining to 10.5% from 17% a year earlier.
Agricultural Sector Performance and Food Security Implications
The agricultural sector, which remains the largest contributor to Kenya’s economy, grew by 3.2% to a nominal value of Sh819.8 billion during the quarter, representing a slight slowdown from the 4.0% growth recorded a year earlier. Nevertheless, agriculture accounted for approximately one-fifth of total economic output and supported the livelihoods of millions of rural Kenyans.
The sector’s performance was bolstered by a 36.2% surge in cut flower exports and a 9.7% increase in milk deliveries to processors, which rose to 249.0 million litres from 227.0 million litres a year earlier. These gains improved household cash flow in dairy regions and increased activity for input suppliers and packaging firms, demonstrating the agricultural sector’s continued importance for both export earnings and domestic food security.
However, not all agricultural subsectors performed well. Exports of coffee, vegetables, and fruits declined during the quarter, alongside reduced sugarcane deliveries and tea production. The coffee export decline to the United States was particularly notable, contributing to reduced earnings from the Americas. These contractions reflected both weather-related challenges in certain growing regions and continued volatility in global commodity prices.
The mixed agricultural performance underscores ongoing food security considerations for Kenya. While dairy and floriculture sectors showed strength, challenges in other subsectors highlight the vulnerability of agricultural output to climatic conditions, market access, and price fluctuations. The government’s efforts to support agricultural productivity through improved irrigation, access to quality inputs, and value chain development remain critical for sustaining sector growth and ensuring food security for Kenya’s growing population.
Manufacturing and Construction: Engines of Growth
The manufacturing sector expanded by 2.5% during the quarter, slightly above the 2.3% growth recorded a year earlier, with non-food manufacturing driving growth. Cement production rose by 15.7% to 2,704.5 thousand metric tonnes, while galvanized steel production increased by 20.3%, both reflecting the robust construction activity occurring across the country.
Credit extended to construction enterprises improved substantially to Sh195.3 billion from Sh129.2 billion, indicating increased financial sector confidence in the construction sector and willingness to support building and infrastructure projects. This credit expansion supported the sector’s 6.7% growth rebound after the previous year’s contraction, with bitumen imports increasing 7.3% to 19,698.5 tonnes, supporting road construction and maintenance activities.
The construction sector’s recovery was further evidenced by increased building plan approvals, expanded real estate development in major urban centers, and continued work on major infrastructure projects including roads, railways, and energy facilities. However, the sector remains vulnerable to interest rate movements, access to affordable financing, and the overall macroeconomic environment, making sustained growth dependent on continued policy support and stable economic conditions.
Looking Forward: Balancing Growth and External Sustainability
As Kenya navigates the fourth quarter of 2025 and looks toward 2026, policymakers face the challenge of sustaining economic growth momentum while addressing the structural imbalances revealed by the widening current account deficit. The disconnect between robust domestic growth and deteriorating external balances is not unprecedented in developing economies undergoing rapid structural transformation, but it does require careful management to avoid triggering external financing crises or unsustainable debt dynamics.
Several factors will influence Kenya’s external position in coming quarters. First, the trajectory of global commodity prices, particularly for oil and agricultural exports, will significantly impact both the import bill and export earnings. Second, the evolution of diaspora remittances, which have provided crucial stability, will depend on economic conditions in key source countries, particularly the United States. Third, the government’s ability to execute its medium-term debt strategy and gradually reduce the debt-to-GDP ratio while maintaining adequate public investment will be critical for long-term sustainability.
The widening current account deficit also highlights the importance of structural reforms to enhance export competitiveness, improve the business environment for manufacturing and value-added production, and reduce dependence on imported capital and intermediate goods. While the surge in industrial machinery and iron and steel imports reflects positive investment in productive capacity, Kenya must ensure these investments translate into enhanced export production and import substitution over the medium term.
As noted by economists, “without tackling the external deficit and ensuring growth reaches rural areas, the recovery will remain uneven.” The government’s National Infrastructure Fund and Sovereign Wealth Fund initiatives, representing a Ksh5 trillion plan approved by Cabinet in December 2025 and awaiting parliamentary approval, aim to finance development without adding to public debt or raising taxes—approaches that, if successfully implemented, could help address the structural challenges underlying the current account deterioration.
For now, Kenya’s robust economic growth provides a foundation for addressing external imbalances, but the threefold expansion in the current account deficit serves as a clear warning that sustained attention to export development, debt management, and external financing strategies will be essential for maintaining macroeconomic stability and supporting continued prosperity for Kenya’s citizens.
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By: Montel Kamau
Serrari Financial Analyst
9th January, 2026
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