Kenya’s Economic Recovery Remains Strong, Although Slowed by Drought and Inflation

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Kenya’s economy continued to rebound from the pandemic in 2022 with real gross domestic product (GDP) increasing by 6% year-on-year in the first half of 2022, driven by broad-based increases in services and industry. This recovery was dampened by global commodity price shocks, the long regional drought, and uncertainty in the run up to the 2022 general elections.

The 26^th edition of the Kenya Economic Update (KEU) notes that the ongoing drought and the cost-of-living increases have affected households throughout the country. The agriculture sector contracted by 1.5% in the first half of 2022 and, with the sector contributing almost one fifth of GDP, its poor performance slowed GDP growth by 0.3%. A recent rapid response phone survey that monitors the impact of shocks on households shows a rise in food insecurity, most severely in rural areas whereover half of households reduced their food consumption in June 2022. Most households reported an increase in prices of essential food items and with many being unable to access core staples, such as beans or maize. In response to the inflationary pressures, the Central Bank of Kenya (CBK) has raised the policy rate thrice since May 2022 by a cumulative 175 basis points to reach 8.75%.

“Kenya can further leverage the agriculture sector to spur growth, poverty reduction, and food security,” said Keith Hansen, World Bank Country Director for Kenya. “Boosting food resilience through community interventions in arid and semi-arid lands while supporting farmer groups to link into sustainable value chains will help to better feed Kenya during periods of drought.”

Kenya’s medium term growth prospects remain positive with GDP projected to grow by 5.2% on average in 2023–24 notwithstanding current global and domestic shocks. The baseline assumes robust growth of credit to the private sector, continued low COVID-19 infection rates, a near term recovery in agricultural production, and high commodity prices favorable to Kenyan exports. These developments are in turn expected to catalyze private investment to support economic growth over the medium term.

“Private sector led growth is critical to job creation and a steady increase in household living standards over time,” said Naomi Mathenge, World Bank Senior Economist for Kenya.

The government reduced the budget deficit in fiscal year (FY) 2021/22 from 8.2% to 6.2% through revenue measures and expenditure moderation. Total revenue increased to 17.3% of GDP in FY2021/22 from 15.7% in FY2020/21, reflecting the pick-up in domestic demand and a range of tax reforms as well as improvements in tax administration and the use of technology. These have yielded a reduction in tax expenditures through harmonization of exemptions, enhanced compliance through voluntary disclosure programs for previously undeclared tax, and easier access to the Kenya Revenue Authority (KRA) web system. The reduction in the fiscal deficit has contributed to the stabilization of the debt-to-GDP ratio at about 67.3% in FY21/22, thereby underlying the importance of fiscal consolidation.

The report recognizes that responding to the rising cost of living and climate change shocks, amid limited fiscal space are some of the immediate challenges facing the government. The KEU recommends the need to prioritize policy options that help to raise both productivity and resilience, at the household, producer, and national levels. The special focus section of this edition delves into policy priorities to advance productivity improvements in agriculture where a large number of Kenyans remain employed, spur economic transformation and job creation through the digital economy, while ensuring support for the most vulnerable households.

Distributed by APO Group on behalf of The World Bank Group.