Kenya’s economy expected to hit 5.3% in 2025 and 2026

From right Dr. Chris Kiptoo PS for National Treasury (C) John Mbadi CS for Treasury and Economic Planning(L) James Muhatia PS for Economic Planning 

Kenya’s economy has demonstrated remarkable resilience in the face of internal and external shocks, underscoring the effectiveness of government policies and a diversified economic structure. From strategic fiscal reforms to sectoral growth initiatives, the country has navigated economic challenges while fostering stability and expansion.

A key highlight of this resilience is the significant reduction in Kenya’s public debt, supported by robust monetary policies, a strengthening currency, and increased investor confidence. As the country moves forward, sustained macroeconomic discipline and improved liquidity will be crucial in translating these gains into long-term economic prosperity.

Kenya has made notable progress in reducing its public debt burden, a critical aspect of its economic strategy. The debt-to-GDP ratio has declined from 71.9% in June 2022 to 66.7% in June 2024, reflecting the government’s commitment to fiscal prudence. As of June 2024, total public debt stood at Ksh 10.56 trillion, with the Present Value (PV) of debt-to-GDP falling from 68.7% in 2023 to 63.0% in 2024.

Several factors have contributed to this improvement:

Strengthening of the Kenyan shilling, which has reduced external borrowing costs.

Fiscal consolidation efforts, including controlled budget deficits and enhanced debt management.

Prudent government spending, focusing on productive sectors while cutting unnecessary expenditures.

With these measures, the government anticipates further debt reduction in the coming months, reinforcing economic stability.

Despite global economic uncertainties, Kenya’s Real GDP growth has remained strong:

Kenya’s economy has demonstrated remarkable resilience in the face of internal and external shocks, underscoring the effectiveness of government policies and a diversified economic structure. From strategic fiscal reforms to sectoral growth initiatives, the country has navigated economic challenges while fostering stability and expansion.

A key highlight of this resilience is the significant reduction in Kenya’s public debt, supported by robust monetary policies, a strengthening currency, and increased investor confidence. As the country moves forward, sustained macroeconomic discipline and improved liquidity will be crucial in translating these gains into long-term economic prosperity.

Kenya has made notable progress in reducing its public debt burden, a critical aspect of its economic strategy. The debt-to-GDP ratio has declined from 71.9% in June 2022 to 66.7% in June 2024, reflecting the government’s commitment to fiscal prudence. As of June 2024, total public debt stood at Ksh 10.56 trillion, with the Present Value (PV) of debt-to-GDP falling from 68.7% in 2023 to 63.0% in 2024.

Several factors have contributed to this improvement:

Strengthening of the Kenyan shilling, which has reduced external borrowing costs.

Fiscal consolidation efforts, including controlled budget deficits and enhanced debt management.

Prudent government spending, focusing on productive sectors while cutting unnecessary expenditures.

With these measures, the government anticipates further debt reduction in the coming months, reinforcing economic stability.

Despite global economic uncertainties, Kenya’s Real GDP growth has remained strong:

• 5.0% in Q1 2024
• 4.6% in Q2 2024
• 4.0% in Q3 2024
• Projected 4.7% in Q4 2024

Overall, Kenya’s real GDP growth for 2024 has been revised to 4.6%, with expectations of an upward trajectory to 5.3% in 2025 and 2026.

A significant contributor to this growth is the external sector, particularly the country’s improving current account deficit, which narrowed from 4.4% of GDP in 2023 to 3.6% in 2024. This improvement has been driven by:

Increased exports, boosting foreign exchange inflows.

Surging diaspora remittances, which grew 16.7% to USD 4.87 billion in the 12 months leading to November 2024 (compared to USD 4.17 billion in 2023).

Kenya’s foreign exchange reserves have also strengthened, standing at USD 10.09 billion by December 2024, providing 5.1 months of import cover. This has bolstered investor confidence and contributed to the appreciation of the Kenyan shilling, which strengthened from Ksh 160.8 per US dollar in January 2024 to Ksh 129.4 in January 2025.

Monetary Policy and Interest Rate Adjustments

To sustain economic momentum, the Central Bank of Kenya (CBK) has adopted a more accommodative monetary policy. Key adjustments include:

Lowering the Central Bank Rate (CBR) from 13% in August 2024 to 11.25% in December 2024, and further to 10.75% in February 2025.

Reducing the Cash Reserve Ratio (CRR) by 100 basis points from 4.25% to 3.25%, enabling banks to lend more to businesses and individuals.

These moves have led to a notable reduction in bank lending rates, enhancing credit accessibility. Major financial institutions have responded as follows:

Co-operative Bank: Base lending rate reduced from 16.5% to 14.5%.

KCB Bank: Reduced from 15.6% to 14.6%.

Equity Bank: Lowered from 17.3% to 14.3%.

Other banks, including ABSA and NCBA, have also made similar cuts.

Additionally, Treasury bill rates have dropped significantly:

91-day T-bill: From 16.1% in January 2024 to 9.11% in February 2025.

182-day and 364-day T-bills: Now below 11%, further easing borrowing costs.

With improved credit availability, private sector investments are expected to accelerate, driving job creation and economic expansion.

Stock Market and Investor Confidence

Investor activity at the Nairobi Securities Exchange (NSE) has surged, reflecting growing confidence in Kenya’s economic outlook.

The NSE 20 Share Index increased from 1,509 points in January 2024 to 2,162.6 points in January 2025.

Market capitalization expanded from Ksh 1.44 trillion to Ksh 1.98 trillion in the same period.

This upward trend signals increased Foreign Direct Investment (FDI) and improved sentiment among both local and international investors.

Inflation Control and Fiscal Stability

Kenya has successfully managed inflation, with rates declining from 9.6% in October 2022 to 3.3% in January 2025. This improvement is attributed to:

Easing food and energy prices.

Strategic fiscal policies, including tax law amendments in late 2024, which reduced the burden on household incomes.

Addressing Pending Bills and MSME Liquidity Challenges

Despite Kenya’s economic gains, pending bills remain a significant challenge, particularly for Micro, Small, and Medium Enterprises (MSMEs). Late government payments have constrained cash flow, reducing profitability and increasing capital costs for businesses.

To address this, the National Treasury and Economic Planning formed a special committee to investigate the root causes of the pending bills crisis. Key issues identified include:

Budget mismatches: A gap between approved budgets and actual government revenue.

Delayed exchequer releases: Approved funds not being disbursed in time.

Mid-year budget cuts, affecting pre-approved commitments.

The committee has proposed several solutions:

Aligning government budgets with actual revenue to prevent overspending.

Fast-tracking the transition to accrual accounting, ensuring financial obligations are accurately recorded.

Enforcing Public Investment Management regulations to improve accountability.

Implementing e-procurement systems to enhance transparency.

Prioritizing MSME payments, especially for businesses owned by women, youth, and persons with disabilities.

Kenya’s economy is on a strong recovery path, backed by fiscal discipline, monetary policy adjustments, and investor confidence. The government’s efforts to reduce debt, ease interest rates, and stabilize the currency have positioned the country for higher economic growth in 2025 and beyond.

However, resolving pending bills and maintaining fiscal discipline will be critical in ensuring that these macroeconomic gains translate into tangible benefits for businesses and households.

With continued policy prudence and strategic investments, Kenya is well on track to becoming a stronger, more resilient economy, capable of withstanding global economic shocks while fostering sustainable growth.

Overall, Kenya’s real GDP growth for 2024 has been revised to 4.6%, with expectations of an upward trajectory to 5.3% in 2025 and 2026.

A significant contributor to this growth is the external sector, particularly the country’s improving current account deficit, which narrowed from 4.4% of GDP in 2023 to 3.6% in 2024. This improvement has been driven by:

Increased exports, boosting foreign exchange inflows.

Surging diaspora remittances, which grew 16.7% to USD 4.87 billion in the 12 months leading to November 2024 (compared to USD 4.17 billion in 2023).

Kenya’s foreign exchange reserves have also strengthened, standing at USD 10.09 billion by December 2024, providing 5.1 months of import cover. This has bolstered investor confidence and contributed to the appreciation of the Kenyan shilling, which strengthened from Ksh 160.8 per US dollar in January 2024 to Ksh 129.4 in January 2025.

Monetary Policy and Interest Rate Adjustments

To sustain economic momentum, the Central Bank of Kenya (CBK) has adopted a more accommodative monetary policy. Key adjustments include:

Lowering the Central Bank Rate (CBR) from 13% in August 2024 to 11.25% in December 2024, and further to 10.75% in February 2025.

Reducing the Cash Reserve Ratio (CRR) by 100 basis points from 4.25% to 3.25%, enabling banks to lend more to businesses and individuals.

These moves have led to a notable reduction in bank lending rates, enhancing credit accessibility. Major financial institutions have responded as follows:

Co-operative Bank: Base lending rate reduced from 16.5% to 14.5%.

KCB Bank: Reduced from 15.6% to 14.6%.

Equity Bank: Lowered from 17.3% to 14.3%.

Other banks, including ABSA and NCBA, have also made similar cuts.

Additionally, Treasury bill rates have dropped significantly:

91-day T-bill: From 16.1% in January 2024 to 9.11% in February 2025.

182-day and 364-day T-bills: Now below 11%, further easing borrowing costs.

With improved credit availability, private sector investments are expected to accelerate, driving job creation and economic expansion.

Investor activity at the Nairobi Securities Exchange (NSE) has surged, reflecting growing confidence in Kenya’s economic outlook.

The NSE 20 Share Index increased from 1,509 points in January 2024 to 2,162.6 points in January 2025.

Market capitalization expanded from Ksh 1.44 trillion to Ksh 1.98 trillion in the same period.

This upward trend signals increased Foreign Direct Investment (FDI) and improved sentiment among both local and international investors.

Kenya has successfully managed inflation, with rates declining from 9.6% in October 2022 to 3.3% in January 2025. This improvement is attributed to:

Strategic fiscal policies, including tax law amendments in late 2024, which reduced the burden on households income

Despite Kenya’s economic gains, pending bills remain a significant challenge, particularly for Micro, Small, and Medium Enterprises (MSMEs). Late government payments have constrained cash flow, reducing profitability and increasing capital costs for businesses.

To address this, the National Treasury and Economic Planning formed a special committee to investigate the root causes of the pending bills crisis. Key issues identified include:

• Budget mismatches: A gap between approved budgets and actual government revenue.
• Delayed exchequer releases: Approved funds not being disbursed in time.
• Mid-year budget cuts, affecting pre-approved commitments.

The committee has proposed several solutions:

• Aligning government budgets with actual revenue to prevent overspending.
• Fast-tracking the transition to accrual accounting, ensuring financial obligations are accurately recorded.
• Enforcing Public Investment Management regulations to improve accountability.
• Implementing e-procurement systems to enhance transparency.
• Prioritizing MSME payments, especially for businesses owned by women, youth, and persons with disabilities.

Kenya’s economy is on a strong recovery path, backed by fiscal discipline, monetary policy adjustments, and investor confidence. The government’s efforts to reduce debt, ease interest rates, and stabilize the currency have positioned the country for higher economic growth in 2025 and beyond.

However, resolving pending bills and maintaining fiscal discipline will be critical in ensuring that these macroeconomic gains translate into tangible benefits for businesses and households.

With continued policy prudence and strategic investments, Kenya is well on track to becoming a stronger, more resilient economy, capable of withstanding global economic shocks while fostering sustainable growth.