Kenya's economic outlook is a mixed bag of challenges and cautious optimism, according to the recently released Kenya Economic Update. While the grip of high inflation is expected to loosen in 2024, Kenyans will likely face a continuation of economic hardship in the near term.
The Kenya Economic Update, issued by the World Bank Kenya on Wednesday, June 5, is painted with a cautiously optimistic brush and highlights a slowdown in economic growth coupled with some positive developments.
The report, a stark contrast to the rosy forecasts of pre-pandemic times, paints a picture of an economy grappling with tight monetary policies and fiscal consolidation efforts. These measures, though necessary to curb inflation, are likely to dampen investment and public spending in the coming year.
Global economic growth, which already experienced a downturn in 2023, is expected to decline further in 2024.
A glimmer of hope emerges in the form of declining global commodity prices, with the exception of oil. This should provide some relief to Kenyan households struggling with the rising cost of living. Food prices, a major concern, are projected to continue their downward trend in 2024, offering some respite to consumers.
However, the labour market paints a concerning picture. The report revealed that the employment situation worsened in 2023 with a decline in real average earnings and a worrying trend of informal employment outpacing formal job creation.
Real average earnings fell by 4.1 per cent, continuing a downward trend since 2020. While total wage employment grew by 4.1 per cent, this was primarily driven by informal employment, which grew by 4.5 per cent, outpacing the 3.3 per cent growth in private sector wage employment.
The labour market has been hit hard by increasing living costs and adverse macroeconomic conditions, impacting both real earnings and formal job creation. Informal employment added approximately 721,000 workers in 2023, compared to 68,000 in the private sector.
Kenya's trade sector has also felt the pinch. Both imports and exports contracted in 2023, reflecting a combination of factors including lower domestic demand, a weakened currency, and subdued global trade. This trend, unfortunately, continues a decline in overall trade volume observed since the early 2010s.
Despite the gloomy near-term outlook, there are signs of potential recovery in 2024. The Kenyan shilling has strengthened against the US dollar, leading to a modest uptick in imports. Additionally, exports of key commodities like tea and horticulture have shown signs of improvement.
The World Bank projects Kenya's GDP growth to average around 5.2 per cent in the medium term (2024-2026). This is a welcome revision from previous forecasts, reflecting improved macroeconomic conditions and the recent Eurobond issuance.
However, the initial year (2024) is expected to see a slowdown to 5 per cent growth due to ongoing fiscal consolidation and a fading agricultural rebound.
The private sector is expected to be a key driver of Kenya's medium-term recovery. Favourable harvests, moderate inflation, and a revival in credit access are expected to boost private consumption.
Additionally, remittance inflows from the Kenyan diaspora are projected to remain resilient, providing crucial support to household incomes.
However, significant risks remain. Extreme weather events, like the recent floods following years of drought, pose a serious threat to agricultural output and food security.
Additionally, the government's ability to achieve ambitious fiscal targets and implement structural reforms will be crucial to maintain macro stability and support job creation.
