World Bank cuts Kenya's 2025 growth forecast as private sector squeezed

The World Bank has cut Kenya's growth forecast for this year by half a point from its initial prediction to 4.5%, it said on Tuesday, citing high levels of debt, high lending rates and a decline in private sector credit.

Kenya, which is East Africa's biggest economy, has recorded robust annual growth rates, but high public debt, repayments, economic inequalities and questions on governance have curbed its performance.

"Domestic borrowing, coupled with high lending rates, risk crowding out the private sector," Naomi Mathenge, a senior economist at the World Bank, told a briefing on the Kenya Economic Update report, which is usually published twice a year.

The government has used the domestic market to fund its budget due to lower financing from external sources, the report said, while unpaid bills and tax revenue shortfalls have undermined its fiscal consolidation efforts.

Authorities have managed to keep inflation and the foreign exchange rates stable since last year, allowing policymakers to start easing, but real lending rates have not followed, the report said.

This has led to a decline in credit growth, affecting sectors such as manufacturing, finance and mining, partly due to lower demand. Bad loans have also increased, especially among small commercial lenders, the report said, compounding the situation.

Private sector credit growth was -1.4% last December, the World Bank said in the report, compared with growth of 13.9% a year earlier.

Kenya also faces risks from its debt, which is 65.5% of GDP, since the country is classified as at high risk of distress.

The economy expanded by 4.7% last year, down from 5.7% in the previous year, partly due to unrest in the middle of last year in protest at tax hikes.

Growth is expected to recover to about 5.0% in the next two years, the World Bank said, provided risks such as poor weather are avoided.

The World Bank urged the government to implement targeted tax reforms, including the elimination of exemptions in certain consumption tax, to boost revenue, support inclusive growth and lower debt.

Reuters