Kenya’s economy is projected to grow by 5.3% in 2025, signaling a rebound from the 4.6% contraction experienced in 2024. This projection is outlined in the 2025 Budget Policy Statement released by the National Treasury in Nairobi. The statement highlights the government’s strategies to stimulate recovery while fostering sustainable growth in key sectors.

Economic Performance and Outlook

The Kenyan economy faced significant challenges in 2024, marked by a slowdown in private sector credit growth and reduced economic activity across critical sectors during the year’s first three quarters. The 2024 contraction, following a robust 5.6% growth in 2023, underscored the need for strategic reforms and interventions. The projected growth of 5.3% in 2025 suggests a gradual recovery trajectory, aligning with regional economic expectations and showcasing Kenya’s potential for resilience.

According to the National Treasury, the projected growth will be supported by enhanced agricultural productivity, a resilient services sector, and improved aggregate demand. Domestic consumption is forecast to remain strong, supported by easing inflationary pressures and a favorable fiscal environment.

Key Drivers of Growth

Kenya’s economic rebound in 2025 is expected to be anchored on three primary sectors: agriculture, services, and information and communication technology (ICT).

Agricultural Sector

Agriculture, which remains the backbone of Kenya’s economy, is projected to grow by an average of 3% in 2025. Favorable weather conditions and productivity-enhancing government interventions, such as subsidies for agricultural inputs, irrigation infrastructure, and value addition initiatives, are expected to drive this growth. Efforts to combat post-harvest losses and improve food security through modern storage facilities and market linkages are also central to the sector’s expansion.

Services Sector

The services sector, which includes tourism, financial services, and public administration, is projected to grow at an average of 6.6% over the medium term. Tourism is expected to benefit significantly from government-led initiatives, such as the promotion of high-profile international conferences, cultural festivals, and wildlife tourism. The anticipated influx of international visitors, coupled with domestic tourism campaigns, is likely to rejuvenate this critical sector.

Reforms in financial services are also expected to play a pivotal role. Ongoing efforts to digitize financial transactions, expand access to credit, and enhance mobile banking solutions are anticipated to bolster economic activity.

ICT Sector

Kenya’s ICT sector continues to be a driver of innovation and growth. Ongoing reforms aimed at improving digital infrastructure and fostering innovation are expected to enhance service delivery across public administration, healthcare, and financial services. The adoption of smart technologies and the expansion of broadband coverage are likely to support the digital transformation of both urban and rural areas.

Monetary Policy and Inflation

Monetary policy is expected to remain accommodative in 2025, providing an enabling environment for economic growth. Inflation is projected to decline to 5.5% in 2025, supported by a stable exchange rate and easing global commodity prices. Lower inflationary pressures will enhance purchasing power and support domestic consumption, which is forecast to average around 87.4% of gross domestic product.

The Central Bank of Kenya has played a crucial role in stabilizing the economy, implementing measures to maintain liquidity in the financial system and curb inflationary trends. The stability of the Kenyan shilling, buoyed by strategic foreign exchange interventions, has also contributed to investor confidence.

Fiscal Consolidation and Debt Management

The government has reaffirmed its commitment to fiscal consolidation, aiming to reduce public debt vulnerabilities while maintaining investments in critical sectors. The fiscal deficit is projected to narrow to 5.0% of GDP in 2025, reflecting the government’s efforts to enhance revenue collection and rationalize expenditure.

Cabinet Secretary for the National Treasury and Economic Planning, John Mbadi, emphasized the importance of balancing fiscal discipline with developmental priorities. Measures such as broadening the tax base, improving efficiency in revenue collection, and curbing non-essential public spending are central to this strategy.

Tourism Revitalization and Economic Diversification

Tourism, one of Kenya’s leading foreign exchange earners, is poised for a strong recovery in 2025. Government efforts to revitalize the sector include targeted marketing campaigns, development of new tourist circuits, and enhanced security in key tourist destinations.

Cultural tourism is also gaining momentum, with investments in cultural festivals and heritage sites aimed at attracting both domestic and international tourists. Wildlife safaris, a cornerstone of Kenya’s tourism industry, are expected to benefit from improved conservation efforts and partnerships with private stakeholders.

Beyond tourism, the government is exploring opportunities to diversify the economy, with a focus on manufacturing, renewable energy, and technology-driven industries. The Special Economic Zones initiative and incentives for local manufacturing are expected to attract investment and create jobs.

Private Sector Activity and Investment Climate

The private sector remains a critical driver of Kenya’s economic growth. Recent data indicate a gradual recovery in private sector activity, supported by improved consumer spending and increased travel. Strengthening credit access for small and medium-sized enterprises (SMEs) is a priority, as they form the backbone of Kenya’s economy.

To enhance the investment climate, the government has prioritized regulatory reforms aimed at reducing bureaucratic bottlenecks, improving transparency, and fostering a business-friendly environment. Efforts to streamline business registration processes and reduce the cost of doing business are expected to attract both local and foreign investors.

Challenges and Risks

Despite the optimistic outlook, Kenya faces several challenges that could hinder economic growth. These include:

1. Global Economic Uncertainty: Slow recovery of global growth and tight financing conditions could impact export earnings and foreign direct investment.
2. Climate Change: Kenya remains vulnerable to climate-related shocks, such as droughts and floods, which could disrupt agricultural output and food security.
3. Debt Burden: While fiscal consolidation measures are underway, the country’s high debt levels pose risks to long-term fiscal sustainability.
4. Geopolitical Risks: Political instability in neighboring countries could disrupt trade and regional cooperation.

Government’s Strategic Vision

The government has outlined a comprehensive vision to address these challenges and achieve sustainable development. Key pillars of this vision include:

• Strengthening Social Safety Nets: Expanding access to healthcare, education, and social protection programs to improve living standards and reduce poverty.
• Investing in Infrastructure: Prioritizing investments in transport, energy, and water infrastructure to support economic growth and enhance connectivity.
• Promoting Green Growth: Leveraging renewable energy and sustainable practices to address climate change while fostering economic resilience.

Conclusion

Kenya’s projected 5.3% economic growth in 2025 reflects a determined effort to overcome recent challenges and chart a path toward sustainable development. The government’s focus on agricultural productivity, services sector resilience, and ICT reforms underscores its commitment to economic transformation.

While risks remain, strategic initiatives to enhance fiscal discipline, diversify the economy, and improve the investment climate provide a strong foundation for growth. As Kenya navigates this critical period, collaboration between the public and private sectors will be essential to realizing the country’s economic potential and ensuring inclusive prosperity for its citizens.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

17^th January, 2024