Kenya’s Growth Expected to Slow in 2022 Due to Ongoing Drought, Ukraine Crisis

NAIROBI Kenya’s real gross domestic product (GDP) is projected to grow by 5.5 percent in 2022 and 5.2 percent on average in 2023–24. This growth rate, while still strong, will be a moderation following a remarkable recovery in 2021 from the worst economic effects of the pandemic, when the country’s economy grew by 7.5 percent, much higher than the estimated average growth in Sub-Saharan Africa of 4 percent.

According to the 25th edition of the World Bank Kenya Economic Update, Aiming High: Securing Education to Sustain the Recovery, the impact of the war in Ukraine is weighing on the global economic recovery from the pandemic. Domestically, a key risk to the outlook is a further worsening of the current drought, which is having a devastating effect on food security and livelihoods in affected parts of the country and is necessitating increased social spending on food assistance. For example, using the Integrated Food Security Phase Classification, it is estimated that 3.1 million Kenyans (out of 13.6 million) living in counties with arid and semi-arid land are food insecure. The baseline economic projections assume that below average rains will hamper agricultural performance and accounts for the downside effects of the ongoing war in Ukraine through increased global commodity prices.

“While Kenya’s economy has been resilient, the multiple recent shocks show the urgency of improving social protection mechanisms to cushion the most vulnerable households,” said World Bank Country Director, Keith Hansen. “This will enable Kenya to move away from other more costly and less well-targeted support measures such as fuel subsidies.”

The report further notes that Kenya’s economic performance remained strong in the early months of 2022, but external challenges have mounted. The economy is vulnerable to the commodity price shocks resulting from the war, particularly through fuel, fertilizer, wheat and other food imports. Global financial conditions have also tightened sharply, increasing external financing costs. However, Kenya’s exposure to the war in Ukraine through direct trade linkages is small, with Russia and Ukraine accounting for only 2.1 percent of total goods trade between 2015 and 2020. Similarly, tourists from Ukraine and Russia do not account for a significant share of Kenya’s tourism market.

On the upside, measures by the Central Bank of Kenya (CBK) that maintained an accommodative monetary policy stance cushioned the economy and helped bolster recovery. Inflation has recently moved higher to 7.1 percent year-on-year in May 2022 as domestic food prices, and fuel prices in March, April and May, increased following the surge in global commodity prices due to the war in Ukraine. The full impact of the global oil price and other commodity prices shock on domestic prices has been cushioned by government subsidies which have, however, come at a fiscal cost. In response to the ongoing surge in global commodity prices and supply disruptions that have added to inflationary risks, the CBK increased the Central Bank Rate from 7 to 7.5 percent in their May 30 meeting to anchor inflationary expectations.

Fiscal consolidation is key to sustaining the recovery, by creating strong conditions for private investment and reopening space for development spending,” said World Bank Kenya Senior Economist, Naomi Mathenge.

Fiscal performance has also benefitted from the strong economic recovery supporting revenues, but this is now being countered by the cost of subsidizing fuels. The rebound in economic activity and ongoing tax reforms and revenue administration improvements have boosted revenue collection. For example, revenue in the current fiscal year through Q3 remained on target and performed above the previous year’s outturn (12.3 percent of GDP in Q3 2021/22 against a target of 11.2 percent of GDP in Q3 2020/21). As a result, the fiscal deficit in Q3 FY2021/22 shrank to 3.9 percent of full-year GDP from 4.4 percent a year earlier. However, the limited passthrough of higher international oil prices to consumers is generating fiscal costs, with the total monthly cost of subsidizing fuel estimated to be approximately US$66 million.

The special topic section of the report focuses on the education sector, which is critical to achieving Kenya’s development goals, accounts for a large share of government spending, and was hit hard by the COVID-19 (coronavirus) pandemic. It examines the performance and financing of the education sector, drawing on a forthcoming World Bank Public Expenditure Review (PER) on education. It explores the impressive improvements which Kenya has achieved in education outcomes, the remaining challenges in the sector including charting a successful recovery from the pandemic, and how the allocation of resources can contribute to resolving these.

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