Kenyan economic growth slows in Q2’24

Kenya's economic growth in the second quarter of 2024 has slowed down to 4.6%, a decline from the projected 4.8%. This unexpected slowdown has raised concerns about the factors contributing to this deceleration and the impact on key sectors of the economy. Christopher Legilisho, Economist at Standard Bank Group, sheds light on the key drivers behind this slowdown and provides insights into the implications for Kenya's financial stability. The slowdown in economic growth can be attributed to a combination of factors, including the anti-tax protests in June and July, which disrupted private sector activity. The protests led to business closures and hindered normal economic operations, contributing to the weakness observed in the second quarter. Additionally, the El Nino rainfall in April and May had adverse effects on sectors such as tourism and transportation, further dampening economic activity. In terms of sectoral performance, agriculture saw a slight slowdown to 4.8% in Q2’24, compared to 6% in the previous quarter. The decline can be attributed to unwinding base effects from favorable rainfall in 2023. On the other hand, sectors like mining, quarrying, and construction experienced a contraction due to the completion of mining activities by some corporates operating in the sector. The slowing economic activity in Kenya can also be linked to high levels of taxation, which have contributed to a decline in private sector credit growth. The tightening cycle, with increasing interest rates, has further compounded the situation, leading to a contraction in credit growth to around 4%, significantly lower than the previous year's levels. The government has implemented various strategies to address liquidity pressures and bolster financial stability. These include issuing a supplementary budget to control borrowing, engaging with multilateral institutions like the IMF for financial support, and exploring additional sources of borrowing such as partnerships with the United Arab Emirates. The government is also considering debt management initiatives like debt-for-food swaps and the issuance of a PANDA bond. In response to the economic challenges, the Central Bank of Kenya is expected to ease liquidity conditions by cutting the policy rate by 75 to 100 basis points. This move is anticipated to stimulate lending in the private sector, boost economic activity, and attract foreign investments. The recent strengthening of the foreign exchange market and increased FX reserves signal growing confidence in Kenya's economy. Looking ahead, the government's focus remains on jumpstarting lending across the economy and reviving economic activity. By implementing measures to ease liquidity pressures, stimulate lending, and improve economic conditions, Kenya aims to navigate through the current economic challenges and set the stage for sustainable growth and development. In the broader East African community, countries like Uganda are also adopting strategies to support businesses and drive economic recovery. Each nation is implementing tailored approaches to address their unique economic circumstances and promote stability and growth.