Forging ahead: Challenges, opportunities, and lessons from Kenya’s experience

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Editor's note:

This viewpoint is part of Foresight Africa 2024.

African economies have recently confronted multiple global and domestic shocks. These include the COVID-19 pandemic, the war in Ukraine, the prolonged drought that affected the horn of Africa, and high global inflation. Global inflation rose from 3.2% in 2020 to 8.7% in 2022, leading to aggressive monetary policy tightening in advanced economies. Over the same period, sub-Saharan Africa (SSA)’s inflation increased from an average of 10.1% to 14.5%. In addition, the risks emerging from climate change are growing. Africa remains heavily exposed to the adverse effects of climate change despite contributing the least to global warming, and the continent is already feeling the weight of extreme weather phenomena, especially droughts and floods.

Despite the headwinds, the Kenyan economy has demonstrated remarkable resilience. The economy recovered from the devastating impact of the COVID-19 pandemic to grow by 7.6% in 2021. In 2022, the economy registered a respectable growth of 4.8%, overcoming the adverse impact of the global supply chain disruptions that arose from the war in Ukraine, and the poor weather conditions that led to a severe contraction of the agriculture sector. The economy grew by 5.6% in the first three quarters of 2023 and is expected to continue strengthening in 2024, supported by a rebound in agriculture following improved weather conditions, a resilient services sector, and government initiatives across key priority sectors.

On the other hand, Kenya’s inflation remained elevated in the second half of 2022 and first half of 2023, largely due to supply side constraints. Headline inflation rose from 5.1% in February 2022 to a peak of 9.6% in October 2022, mainly on account of higher food and fuel prices. Food inflation increased substantially from 8.7% to 15.8% due to drought conditions that adversely affected local food production, as well as higher international food prices triggered by the war in Ukraine. Following these sustained inflationary pressures, the Central Bank of Kenya (CBK) raised the policy rate (Central Bank Rate) cumulatively by 350 basis points from 7.0% to 10.5% over the period May 2022 through June 2023. This helped to anchor inflation expectations and mitigate second order spillover effects from the high food and energy prices. The monetary policy actions were complemented with government measures, such as zero-rating of import duties on select key food items and subsidizing fertilizer. These measures, combined with increased food production following improved weather conditions from March 2023, helped to ease inflationary pressures. Consequently, headline inflation returned to the inflation target band of 5 ± 2.5% in July 2023 and has since remained within the band. To further mitigate against inflationary pressures and the weakening of the domestic currency, the CBK increased the policy rate by 200 basis points in December 2023. In addition, the CBK has embraced a forward-looking monetary policy framework and continues to implement reforms aimed at improving monetary policy transmission and effectiveness. 

Kenya has made great strides in advancing financial inclusion and distinguished itself as a leading regional hub for financial innovation. Access to formal financial services has expanded from 26.7% of the adult population in 2006 to 83.7% by 2021, largely driven by mobile-based financial services and mobile banking. Kenya has the largest and most diversified banking sector in the region, with an asset base of KSh 7.413 trillion (USD $61 billion) as of end of September 2023, and a branch network of over 1,500 branches across the country. Despite the challenging global and domestic economic environment, the sector has remained buoyant, stable, and resilient. Kenyan banks have expanded their outreach in the East African Community region and beyond, thereby promoting regional trade and investments.

Although climate change remains a significant risk, it is embedded with opportunities for greening finance and investing in green growth. These include financing of climate-smart agriculture, renewable energy, and sustainable infrastructure. CBK is committed to greening the financial sector in line with best practices. In this regard, the CBK issued guidelines on climate-related risk management to the banking sector in October 2021 to facilitate the entrenchment of climate risk management in the operational framework and business models of commercial banks. The government of Kenya continues to champion sustainable solutions to climate change, including the recent hosting of the inaugural Africa Climate Summit.

Policy responses [to challenges] should be timely, targeted, and well-coordinated, with involvement of all key stakeholders including the government, central bank, and financial sector players.

As we look ahead towards 2024, significant challenges remain. The uncertainty within the global environment remains a risk factor for emerging market economies, including Kenya. Although global inflation has generally eased, the impact of rapid monetary policy tightening in advanced economies has resulted in a sharp tightening of global financial conditions, reflected in the prevailing high yields on sovereign bonds and depreciation of domestic currencies against the US dollar and other major currencies. These factors have exacerbated debt sustainability challenges in SSA amid tight budgetary constraints and pose a significant risk to inflation. Given the limited fiscal space, expenditures toward social sectors, public investment, and safety nets for poor and vulnerable groups have become highly constrained. Additionally, inclusive and sustainably higher growth is needed to effectively address widespread unemployment, particularly among the youth.

Several lessons can be gleaned from Kenya’s policy responses to the multiple challenges faced in recent times. First, policy responses should be timely, targeted, and well-coordinated, with involvement of all key stakeholders including the government, central bank, and financial sector players. Second, a robust monetary policy communication strategy serves to anchor market expectations and prevent excessive market volatility. This has improved the public understanding of monetary policy decisions, anchored market expectations, and prevented undue market dislocations. Third, policies aimed at addressing supply-side constraints, combating climate change challenges, increasing employment, poverty reduction, and promoting food security are vital to resolve the structural challenges that monetary policy alone cannot address. Finally, there is need to enhance efficiency and financial inclusion through increased digitization. The CBK continues to be at the forefront in promoting and leveraging digital technology to improve efficiency and access to financial services. For instance, the recently upgraded Central Securities Depository infrastructure, DhowCSD, is a major step in enhancing efficiency in investment in government securities and transforming Kenya’s financial markets.


  • Footnotes
    1. Economist intelligence. 2022. “Inflation in Africa will ebb slowly in 2023”
    2. Quarterly GDP Report, Third Quarter 2023, KNBS. Fourth Quarter 2023 GDP Report yet to be released.
    3. The Governor, who also serves as the chair of the MPC, holds a post MPC press briefing that is livestreamed on all CBK social media platforms. The Committee meets with commercial bank and private sector CEOs to apprise them on the monetary policy decision.
    4. CBK Press Release. 2023. “H.E. President William Ruto Launches DhowCSD”. The Central Bank of Kenya. September 11, 2023.