World Bank Cuts Kenya’s 2025 Growth Forecast to 4.5% Amid Mounting Debt and Credit Woes

The World Bank has lowered Kenya’s 2025 economic growth projection to 4.5%, a reduction of 0.5 percentage points, primarily due to growing public debt, elevated lending rates, and a sharp contraction in private sector credit. The revised forecast signals concerns about Kenya’s economic trajectory, especially as the country has traditionally recorded robust growth figures in the East African region.

According to the World Bank’s latest Kenya Economic Update, high levels of domestic borrowing are crowding out private investment, while reduced access to external funding has forced the government to increasingly depend on local financial markets. Compounding the issue are shortfalls in tax revenue and unpaid government bills, which are undermining fiscal consolidation efforts.

Despite macroeconomic stability in areas such as inflation and exchange rates, persistently high real lending rates have slowed credit growth significantly. Key sectors including manufacturing, finance, and mining have been hit, exacerbated by rising non-performing loans, particularly among smaller commercial banks. This decline in credit has contributed to a broader economic slowdown.

The report notes that private sector credit growth dropped dramatically from 13.9% in 2023 to -1.4% in December 2024, underlining the extent of the financial squeeze. Kenya’s debt has ballooned to 65.5% of GDP, pushing the country into the “high risk of distress” category, according to the World Bank, further limiting fiscal flexibility.

Looking ahead, the World Bank expects a modest recovery with growth potentially rebounding to 5.0% by 2026—conditional on favorable conditions such as stable weather and improved fiscal management. To bolster recovery and ensure inclusive growth, the institution recommends Kenya adopt targeted tax reforms, including eliminating certain consumption tax exemptions to boost revenue and reduce the national debt burden.

Source: Arise