Kenyan Economy Refused To Let Go During The Polycrisis

Multiple challenges loomed over the economy’s growth momentum and raised the cost of living. Inflation surged to multi-year highs in 2022 in the wake of rising world food and fuel prices caused by global supply chain disruption and the Russian invasion of Ukraine.

On top of that, the adverse weather shock experienced by the East African countries in the form of the worst drought in four decades not only aggravated the inflationary pressures but also subjected millions of people to severe food insecurity and loss of livelihoods.

The shilling remained under pressure throughout 2022 as major central banks set on a tightening cycle and Kenya’s official foreign exchange reserves started to deplete in the context of high external financing needs amid the difficulty of access to international capital markets.

Fiscal outcomes remained under stress as avenues of external borrowing were restricted and fiscal space shrank as the government resorted to limiting the passthrough of international food and energy prices on domestic inflation.

Kenya’s economic performance softened in 2022, steering towards the country’s long-term growth rate. Real GDP expanded by 4.8 percent in 2022, a deceleration from the strong rebound from the Covid-19 crisis at 7.5 percent annual growth in 2021 but broadly aligned with growth rates of Kenya’s potential GDP as well as of the pre-pandemic decade average.

The climate shock of the last two years has been a major drag on economic growth, with growth in real GDP excluding agriculture standing at 6.3 percent in 2022.

Besides, the impacts of tightening domestic macroeconomic policies and challenging global financial conditions significantly hurt domestic economic activity, especially in the latter half of the year. The cost of living pressures and difficult financial conditions dampened major drivers of demand.

Private consumption—the usual driver of domestic demand in Kenya, accounting for roughly 62 percent of output growth in 2021—slowed markedly in 2022 as soaring domestic prices and a fall in agriculture output hurt real disposable incomes.

Higher remittance inflows cushioned the drop in disposable incomes, likely averting a stronger hit on private consumption and economic growth.

The deceleration in private consumption was only partially offset by a higher contribution from government consumption, led by increased subsidies to mitigate the impact of higher fuel and food prices.

Investment is estimated to have contracted in 2022 in line with an 11 percent y/y decline in development spending in 2022 on fiscal consolidation measures.

A falling shilling amid foreign exchange liquidity shortages and worsening global financial conditions weakened the investment climate, with capital goods imports increasing by just 1.2 percent in 2022 compared to a growth of 20.4 percent in 2021.

The contribution of net exports to domestic demand turned slightly positive on account of significant import deceleration.

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