Kenya Economic Report 2023 on Cost of Living and the Role of Markets

Abstract

The Kenyan economy rebounded solidly in 2021 due to improved performance of the services sector and industry, and the re-opening of the economy in the post-COVID-19 period. In 2022, the recovery momentum was, however, disrupted internally by a prolonged drought, which suppressed performance of the agricultural sector, and externally by the spillover effects of the Russia - Ukraine war and the tight global financial markets that saw sustained strengthening of the dollar and high interest rates. In 2022, the economy grew by 4.8 per cent compared to 7.6 per cent in 2021. The average growth of the services sector was 7.0 per cent compared to 10.0 per cent in 2021 while the industry sector grew by 3.9 per cent compared to 7.5 per cent in 2021. The agricultural sector contracted by 1.6 per cent in 2022 compared to an average growth of 0.2 per cent in 2021. Inflation rates crossed the government upper target band of 7.5 per cent, resulting to high cost of living. Previously, inflation rates breached the target band mainly because of drought condition which adversely affected the availability and cost of food. Inflation rates averaged 7.7 per cent in 2022 compared to 6.1 per cent in 2021. The Central Bank of Kenya tightened monetary policy stance by cumulatively increasing the policy rate by 1.75 percentage points to 8.75 per cent in February 2023. The government sustained its commitment to the fiscal consolidation path, with fiscal deficit accounting for 3.5 per cent of GDP for the first three quarters of 2022/23 compared to 4.1 per cent in the same period in 2021/22. However, government revenue and grants for the first three quarters of 2022/23 was 11.7 per cent of GDP against a target of 12.3 per cent of GDP, while expenditures were 15.2 per cent of GDP against a target of 16.1 per cent