Introduction
Kenya's economic trajectory in 2025 is set against a backdrop of both resilience and uncertainty. While gross domestic product (GDP) growth remains robust, supported by a recovery in agricultural sector output and expansion in services, recent fiscal adjustments as well as other policy shifts continue to redefine the economic landscape. The rejection of the 2024 Finance Bill exposed deep-seated concerns over the government's revenue strategies, underscoring the need for more inclusive and equitable tax policies that minimise the burden on the most vulnerable segments of society. This has prompted a necessary recalibration amid heightened public scrutiny. Nonetheless, the Kenyan Shilling recorded a 17.4% appreciation against the United States Dollar (US$) in 2024, largely due to greater investor confidence following the successful full repayment of Kenya's inaugural Eurobond of US$2 billion, issued in 2014, alongside improved foreign exchange reserves. However, sustaining this momentum will require continued prudent management of foreign reserves and external debt obligations. In addition, inflation eased by 320 basis points (bps), to an annual average of 4.5% in 2024 from 7.7% the previous year, offering consumers a much-needed reprieve. Yet, projected government spending, is set to rise to Kshs 4.3 trillion in fiscal year (FY) 2025/26 [1], posing renewed risks of price pressures, particularly if discipline in public finances falters.
According to the 2025 Draft Kenya Budget Policy Statement released by the National Treasury, the fiscal deficit is expected to moderate to 3.9% of GDP, reflecting a shift towards fiscal consolidation. Nonetheless, concerns persist regarding the sustainability of revenue mobilisation and the execution of development plans. Agusto & Co. notes that alongside fiscal and structural reforms, Kenya has a unique opportunity to drive sustainable development through the integration of green finance into its economic strategy. The increasing adoption of county-level Climate Change Funds (CCFs) and growing global interest in green and sustainable bonds position Kenya favorably to attract climate-focused investments. With the estimated annual global climate finance at USD 1.6 trillion [2], leveraging these mechanisms for funding renewable energy projects, climate-smart agriculture, and resilient infrastructure could unlock new growth opportunities while reinforcing environmental sustainability. Ultimately, the success of ongoing reforms will hinge on a delicate balance between political will, economic resilience, and public confidence in the administration's ability to navigate an evolving domestic and global landscape.
GDP Growth: Beyond Momentum - What Will Drive Kenya's Economy in 2025?
Agusto & Co. asserts that Kenya's economic trajectory in 2025 will be predominantly influenced by the resilience of its agricultural sector, expansion within services, and selective recovery in industry supported by infrastructure investment. The country recorded a 4% GDP growth rate in Q3 2024, primarily driven by agricultural recovery resulting from favorable weather conditions throughout the first nine months of 2024, alongside an uptick in accommodation and food services fuelled by increased tourism.
Agriculture remains a critical pillar of economic growth, contributing approximately 23.7% to GDP. However, challenges such as climate volatility, logistical inefficiencies, and fluctuations in global commodity prices pose significant risks to sustained agricultural output. The services sector - which constitutes about 58% of Kenya's GDP - continues to benefit from growth in finance, transport, information and communication technology (ICT), and tourism. The ongoing digital transformation and infrastructure development underpinning this sector's resilience are expected to support sustained expansion into 2025. Nevertheless, industrial output remained subdued in 2024 due to elevated borrowing costs, fluctuating raw material prices, and supply chain constraints that dampened growth prospects. Effective policy execution coupled with increased private-sector participation will be essential for unlocking the full potential of this sector.
Agusto & Co. projects a GDP growth rate of 5.6% for 2025, driven by agricultural resilience, infrastructure investment, and digital transformation. However, maintaining this growth trajectory will depend on prudent fiscal management, effective policy execution, and a stable external environment.
Kenya's Inflation Trajectory: A New Normal or an Outlier
In 2024, Kenya witnessed a significant easing of inflation rates to an average of 4.5%, marking the lowest level in over a decade compared to 7.7% in 2023. This decline was primarily driven by lower energy prices, increased agricultural output, and sustained monetary tightening by the Central Bank of Kenya (CBK). Favorable weather conditions bolstered domestic food supply chains leading to price stability in key food commodities.
Nevertheless, inflation is anticipated to trend upward again with an average forecast of 5.5% in 2025, yet remaining within the CBK's target range of 2.5% to 7.5%. Rising global crude oil prices may elevate transport and fuel costs - potentially reversing some energy-related relief observed in 2024 - while a rebound in consumer demand coupled with climate-related uncertainties affecting food supply could contribute to renewed price pressures. Despite these challenges, inflation is likely to remain manageable due to prudent monetary policy measures alongside structural improvements within supply chains.
Monetary Policy: A Shift Towards Accommodation Amid Stabilising Inflation
In response to escalating inflationary pressures throughout 2023, the Central Bank of Kenya implemented several contractionary monetary policies aimed at stabilising the economy - a strategy that extended into 2024 as well. The Monetary Policy Committee (MPC) maintained a tight stance which successfully moderated inflation below mid-point targets while stabilising exchange rates. As a result of these efforts, the MPC opted for gradual reductions in the Central Bank Rate (CBR), lowering it from 12.75% in August 2024 to 11.25% by December 2024, and further to 10.75% on 5 February 2025 - a clear indication of improving macroeconomic conditions. Consequently, yields on government securities declined significantly; for instance, the yield on the 364-day treasury bill fell from 15.9% in December 2023 to 11.4% by December 2024.
Looking forward into 2025, monetary policy is expected to transition further towards an accommodative stance with projections suggesting that CBR may decline to around 10% by year-end - this adjustment being supported by sustained inflation moderation and improved foreign exchange inflows alongside a more balanced economic outlook. Lower borrowing costs are likely to spur credit expansion particularly within the private sector - fostering both investment and consumption - while ensuring that policy adjustments do not reignite inflationary pressures remains paramount.
Exchange Rates: Circumnavigating Stability
In Full-Year (FY) ending December 31st 2024, the Kenyan Shilling appreciated by 17.4% against the US dollar - a development largely attributed to enhanced investor confidence following successful Eurobond repayments as well as increased diaspora remittances within a more stable macroeconomic environment. This appreciation saw exchange rates strengthen to Kshs 129.3/US$, further supported by robust foreign exchange inflows from agricultural exports coupled with monetary policies that alleviated pressure on external sectors. However, sustaining this positive trajectory hinges on continued fiscal discipline alongside effective management strategies concerning external debt obligations and foreign reserves -essential for cushioning against potential external shocks.
Looking ahead into 2025 we anticipate a more stable exchange rate environment with projections indicating that the Shilling may close at approximately Kshs 133.5/US$ - an outlook grounded on strategic interventions designed to maintain liquidity within foreign exchange markets while navigating external risks such as fluctuations in global commodity prices. Strengthening Kenya's export base along with enhancing competitiveness within global trade will be crucial for ensuring long-term currency stability while bolstering resilience against external volatility.
Fiscal Balancing Act: Navigating Ambitions and Constraints
The 2025 Draft Budget Policy Statement, released by Kenya's National Treasury outlines an ambitious fiscal roadmap targeting higher revenues alongside increased spending paired with structured debt management strategies; however, feasibility remains uncertain amidst public opposition towards tax measures compounded by pressing needs for fiscal consolidation. Revenue collection is projected at Kshs 3.6 trillion, reflecting a rise of 14.9%, yet achieving this target will necessitate sustainable revenue strategies given past resistance towards tax proposals within Finance Bill discussions for FY 2025/26. The government aims to strengthen tax administration by expanding the tax base, leveraging technology to enhance tax processes, sealing revenue loopholes, and improving overall tax system efficiency. In addition, there is a renewed focus on non-tax revenues generated by Ministries, Departments, and Agencies through public service offerings. Concurrently planned government expenditure is set for an increase up to Kshs 4.3 trillion, raising concerns regarding potential fiscal strain should revenue mobilisation fall short. Notwithstanding, the Government of Kenya plans to finance the budget deficit through a mix of domestic (72%) and foreign sources (28%).
While expectations indicate narrowing deficits down towards approximately 3.9% of GDP; balancing consolidation efforts with ongoing economic momentum poses significant challenges as aggressive deficit cuts could adversely impact critical public investments. To bridge the gap, the government plans to mobilize funds through a combination of domestic issuances - primarily Treasury bonds and bills - and external financing from multilateral, bilateral, and selective commercial sources, prioritizing concessional borrowing where possible. The Bottom-Up Economic Transformation Agenda (BETA) continues serving as an anchor for government priorities focusing heavily on agriculture alongside Micro Small Medium Enterprises (MSMEs) as well as affordable housing initiatives - though their success ultimately rests upon effective financing models complemented by private-sector engagement.
Conclusion
Kenya's economic outlook for 2025 presents a nuanced interplay of opportunities and challenges, with policy execution emerging as a pivotal determinant of the nation's trajectory. While GDP growth is projected to accelerate, underpinned by a robust agricultural sector, a dynamic services industry, and sustained infrastructure development, fiscal sustainability remains a pressing concern. The government's capacity to implement effective revenue mobilisation measures, uphold fiscal discipline, and catalyse private-sector engagement will be instrumental in realising its economic ambitions. Furthermore,maintaining exchange rate stability and capitalising on emerging opportunities in green finance could enhance Kenya's long-term economic resilience. Overall, the country's economic performance in 2025 will hinge on the alignment of policy reforms with the need to preserve macroeconomic stability and investor confidence, whilst navigating an increasingly uncertain global landscape.
[1] Draft 2025 Budget Policy Statement