Africa Watch – On a tightrope
16th December 2024

Kenya’s central bank slashed its benchmark lending rate by 75 basis points to 11.25%, marking its second significant cut to stimulate growth amid controlled inflation. The World Bank reduced Kenya’s 2023 growth forecast to 4.7% from 5.0%, attributing the downgrade to floods, anti-government protests, and stalled fiscal reforms. Persistent debt issues, high servicing costs, unpaid bills, and revenue shortfalls have forced spending cuts and raised domestic borrowing. Although this year’s growth lags last year’s 5.6%, it surpasses the sub-Saharan Africa average of 3%. With effective fiscal reforms, Kenya’s growth could rise to 5.1% in the medium term.
It has been a challenging year for East Africa’s largest economy, Kenya, as it grapples with fiscal and social pressures. Key among these challenges is a fragile fiscal structure, exacerbated by debates on how to structure the national budget effectively and widespread protests against tax hikes that have strained public sentiment.
The Kenyan Treasury’s Medium-Term Debt Management Strategy, published in February, highlighted the precarious state of public finances. As of June 2023, the country’s public debt was 70.8% of its Gross Domestic Product (GDP), while total debt servicing accounted for 58.8% of revenue. In tangible terms, for every Ksh 100 the government earns, Ksh 70.80 goes toward repaying debt, leaving little fiscal room for critical investments. This elevated debt-to-GDP ratio raises red flags for Kenya’s economic stability. A high debt burden limits the government’s capacity to allocate resources to essential public services, infrastructure projects, and social welfare programs. Moreover, it diminishes Kenya’s ability to respond effectively to economic shocks, posing significant risks to sustainable economic growth.
The current fiscal trajectory indicates that bold reforms will be necessary to address these structural challenges. Strategies like cutting non-essential expenditures, broadening the revenue base, and enhancing debt management systems could help stabilise Kenya’s fiscal health. Kenya’s fiscal predicament is further complicated by the rapid escalation of public debt over the past decade. Despite an annual economic growth rate of 3.9% during this period, public debt surged at an alarming compound annual growth rate (CAGR) of 18.1%, outpacing economic expansion. This imbalance underscores the unsustainable trajectory of Kenya’s fiscal policies. Not only does the country’s debt-to-GDP ratio exceed the International Monetary Fund’s (IMF) recommended threshold of 60%, but it also signals systemic vulnerabilities that could hinder long-term growth.
Efforts to address these challenges have faced significant hurdles. The withdrawal of the Finance Bill 2024, which was designed to raise additional revenue, has deepened Kenya’s fiscal woes. The lack of a clear alternative to offset the revenue shortfall from the bill’s withdrawal has left a noticeable gap in Kenya’s financial planning. Moreover, innovative revenue-generating measures, such as the much-discussed Adani deal, have fallen short of expectations, highlighting the need for more robust and sustainable fiscal solutions. Kenya’s road to economic recovery appears fraught with uncertainty. While its historical growth trajectory reflects its potential, the current fiscal landscape underscores the need for decisive and pragmatic reforms. Without a clear plan to navigate its fiscal crisis, Kenya’s economic growth prospects remain fragile, and its ability to meet developmental goals hangs in the balance. The moment’s urgency demands a recalibration of fiscal priorities to secure a sustainable and resilient economic future.