Kenya

major macro economic indicators

(e): Estimate (f): Forecast *Fiscal year from 1 July to 30 June; year 2023 from July 2022 to June 2023

RISK ASSESSMENT

Vaccination campaign underpins a stronger recovery

The acceleration of the economic rebound in 2022 partly depends on the vaccination progress, which is lagging far behind. This will expose the country to fresh COVID-19 outbreaks that could lead to longer or stricter restrictions, particularly in the first half of the year, and should further discourage tourism from abroad (10% of GDP and 9% of employment in 2019). Private consumption (81% of GDP) is expected to be the key growth driver in 2022 thanks to the recovery on the labour market. With the slow return of tourists from the second half of 2022 onwards, the unemployment rate could fall back to its pre-COVID level of 5%, resulting in higher wages. However, higher inflation - due to higher energy prices following the reduction in subsidies – will erode some of the gains in purchasing power. The price pressure is not reflected in the yearly inflation rate in 2022, due to special effects coming from the previous year. The Central Bank of Kenya is expected to respond to inflation by hiking its interest rate from its decade low of 7% to 7.5%, which could also support capital inflows. A new trade and investment deal with the UK worth USD 184 million will drive investments (17% of GDP). In addition, the British oil exploration firm Tullow Oil has finally presented its plan to bring the Lokichar (Turkana county) oil field on-stream after several postponements, but further investments will likely be postponed again. Growth in public investment and consumption will be limited by fiscal consolidation efforts. This is the basis for a new three-year financing package (Extended Fund Facility and Extended Credit Facility) approved by the IMF in April 2021. Net trade should remain a drag to economic growth. Merchandise exports (12% of GDP) will continue to benefit from the strong demand for fruits and vegetables (14% of exports), but growth of tea exports (23%) should remain sluggish due to strong supply from other exporters on the global market. While services exports should increase noticeably with the slow return of tourists, higher imports should more than offset this development. 

High twin deficits and debt

While remaining significant, the deficit forecasted in the 2021-2022 budget falls noticeably. The government removed COVID-19 related subsidies and expenditures, while the further economic recovery will generate higher receipts. Nevertheless, authorities should still increase spending to fight insecurity and drought in the North, as part of the 3rd stimulus package (November 2021). A narrower budget deficit is in line with the current IMF programme, with USD 2.34 billion at stake, of which USD 984 million have already been disbursed. Nevertheless, public debt will still grow, but at a slower pace, up to 70% of GDP. The current account deficit should remain at around 5% of GDP. Positive developments coming from services exports and higher remittances from Kenyans living abroad will be offset by an increase in the huge merchandise trade deficit. Public external debt (37% of GDP), which is divided between commercial (30%), bilateral (30%, around half of it is held by China) and multilateral creditors (40%), should continue to climb, also because of the high debt service that will increase with the end of the suspension of bilateral debt servicing this year.

All eyes on the presidential election

The context of the presidential election, scheduled in August 2022, became more complicated after Kenya’s High Court ruled in May 2021 to reject the planned constitutional amendment that would have most notably introduced the position of Prime Minister. This reform was originally part of a truce between President Kenyatta and Raila Odinga, his main opponent in the 2017 election, to secure political stability. This means that Kenyatta will not be able to retain some power by occupying the prime minister position after his second and final presidential term ends this year. Nonetheless, in a country where many still vote along ethnic lines, Kenyatta, an ethnic Kikuyu (17% of the population, largest ethnic group), declared his support for Odinga, a Luo (11% of the population), forming an unusual alliance. This could put Deputy President William Ruto - a member of the Kalenjin ethnic group (13%, the third largest) who has not received the president's support due to personal disagreements - in the best position to win the election with the support of his ethnic group and some of the disappointed Kikuyu. Due to the concentration of power, elections are driven by ethnic voting and often accompanied by violence outbreaks. Ruto has also gained a lot of support among young people by staging himself as the candidate of the “Hustler Nation”, in opposition with Kenyatta and Odinga, names that have been at the forefront of the domestic political scene since the 1960s.

Last updated: February 2022