On the Kenyan economy under William Ruto’s presidency
Still muddling through despite the government’s best efforts
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This is the first of four posts that offer reflections on the first anniversary of the June 25, 2024 protests and storming of Parliament in Kenya. The second post will explore how Ruto could get reelected despite his ongoing political troubles. The third post will speculate on how Ruto might lose in 2027, incumbency advantage notwithstanding. The final post will offer a general commentary on how the current moment fits within the wider historical political economy of Kenya. For background, be sure to read the four pieces from last year in the aftermath of the protests here, here, here, and here. If I may say so, I think the pieces have aged well.
I: The mixed signals on the Kenyan economy
The Kenyan economy is a mixed bag. On the one hand, dysfunction and lack of ambition are the defining features of the current governing coalition, most attempts at policymaking, and a significant share of operations in the administrative-bureaucratic apparatus (there are many islands of excellence, of course). But on the other hand, the private sector remains quite resilient and continues to chug along despite the high levels of policy risk caused by generalized political and policy dysfunction. I also view the increasing intolerance towards mediocrity in the public sector — and related protests — as a positive signal. Many Kenyans are done settling for less.
Growth in annual output will hit between 5-5.5% in 2025. While the trend in real incomes remains flat, consumer spending power is up 24% compared to pre-pandemic levels — partially driven by better access to credit throughout the income ladder (interest rates are another matter). Along these lines, the share of households with at least $5000 per annum in disposable income will continue to grow in the medium term. This is reflected in the fact that (middle class) Kenyan households are spending more money on durable consumer products than ever before — so much so that the Chinese appliances and consumer electronics firm Haier plans to set up an assembly plant in Kenya in 2026.
While some big name firms have recently exited the market due to a deterioration in the business environment, it’s also true that some of them simply couldn’t compete against new entrants (I previously wrote about this phenomenon in Nigeria). Even the stocker market has recovered from its most recent nadir in 2023.
With regard to the bigger macro picture, the shilling has largely stabilized, thereby substantially reducing currency risk (the Central Bank’s role in engineering this outcome continues to be debated). Remittances (up 19% in 2024), exports (10.4%), and tourism (14.7%) continue to trend upwards, thereby bolstering the country’s forex holdings. The latest figures show at least 4.8 months of import cover. Imports grew by 3.6% in 2024. The Central Bank of Kenya retains a conservative approach to interest rates, which has keep inflation well within its preferred band. Annual inflation in May 2025 was a modest 3.8% (down from 7.7% in 2023).
Several sectors of the economy continue to provide lucrative returns and promises of growth — including agriculture (especially the fish and livestock, coffee and horticulture sub-sectors), banking, fast-moving consumer goods, ICT, business processes, high-end real estate, and logistics.
Given the paucity of good real-time data, it’s still unclear whether the recent rebound in agricultural growth is a response to policy interventions or improvements in rainfall (see below) and global price shifts. Rain-fed farming dominates the sector. Either way the administration is likely to reap political dividends from these developments, especially if it can smartly boost growth in non-traditional agricultural exports.
The positive signals in the economy are also evident in the May CEOs survey conducted by the Central Bank. Comfortable majorities of respondents expect growth to remain the same or increase. CEOs in the service sector are the most bullish, followed by agriculture, and then manufacturing.
And then there are the headwinds. The government will continue to crowd out private investments through excessive domestic borrowing (upwards of KES 635b - US$ 4.91b - in the coming year) in order to finance a deficit that’s about 5% of GDP (overall debt/GDP will remain elevated at just under 70% into the medium term). Promises of fiscal consolidation in budget policy statements make little sense when months hence the government passes multiple supplementary budgets that blow up the deficit. Because banks prefer the security of government paper, domestic lending to the private sector as a proportion of GDP (under 32%) is yet to recover from its ~36% peak in 2015 (since GoK honchos like comparisons with Vietnam, its equivalent figure is over 130%).
Kenya’s revenues-centric IMF program collapsed after the country failed to achieve taxation and deficit targets (who’d have seen that coming?). Yet moral hazard being what it is, it is very likely that the government will negotiate another IMF program ahead of the 2027 election in order to access foreign credit markets at reasonable rates (an IMF team is currently in Kenya to “assess the impact of corruption on public finances”). The current budget envisages at least US$2.23b in external borrowing. Overall, the fact that Kenya relies more on domestic borrowing, as well as the downward trend in domestic interest rates, will reduce the sting of interest payments (currently at over 53% of total revenues).
Meanwhile, due to the tight fiscal space, capital expenditure is at the lowest level in 20 years. The pace of capital investments might increase once the rent-seeking networks figure out how to play the PPP game in the Kenyan context. The two big projects likely to be implemented in the near future (both with PPP components) are the extension of the standard gauge railway to Mombasa and the expansion of sections of the Mombasa-Malaba road. Both projects have huge implications for northern corridor logistics hub and development in the wider region. To make up for the rigidity of the budget, the administration is likely to double down on the affordable housing scheme, construction of markets, and the odd stadium. And like the example of the KES 25b industrial parks dream, many of these will suck up scarce resources and wind up as stalled projects. To make up for the shortfall in the development budget, I foresee a move towards more explicit financial repression in an effort to channel private savings towards government paper or to finance PPP investments in infrastructure (admittedly, with the right kinds of innovation this could unlock much-needed investment shillings for critical infrastructure).
Most of the government’s spending in the short-term will be focused on recurrent expenditures and interest payments. The struggle to settle KES 523b (US$4b) of pending bills to suppliers. Notice that the pending bills partially explain the banking sector’s high NPL ratio of 16.4%.
Given its revealed approach to policymaking so far, Ruto’s administration is highly unlikely to preside over the beginnings of Kenya’s economic takeoff.
To be clear, the structural forces pushing against economic takeoff in Kenya are principally political; and the current administration reinforces most of the negative influences of politics on economic outcomes. Terribly inefficient rent seeking is the organizing principle of much of the policymaking apparatus. This has led to a substantial deterioration in policy formulation and implementation (a process that started under Uhuru Kenyatta’s administration). For example, tax policy has recently become erratic and prioritizes revenue generation for short-term liquidity purposes (interest payments and buying political support), as opposed to being anchored in a pro-growth long-term revenue mobilization strategy. Other examples include recent major policy failures in education and healthcare where dealmaking has eclipsed serious attention to outcomes. Cronyism and variable policy enforcement have festered, making it impossible to make any significant investments without having to pay off officials.
The necessities of “coalition musical chairs” have aggravated this problem. Volatility in the cabinet and ministerial bureaucracies is at its highest level in recent years.
Perhaps most importantly, senior leaders in the administration no longer even pretend to care about honoring Kenya’s social contract (and the rule of law) as a foundation of policymaking. This has significantly eroded government legitimacy and raised the cost of governance. Allies must be bought in nakedly transactional and therefore terribly non-credible deals; opponents are repressed in the crudest ways; and the public responds with greater permissibility of non-compliance to government policies. It is not a surprise that in the aftermath of last year’s protests the State House got the biggest increase (44%) in the supplementary budget. The president continues to proliferate his retinue of “advisers.” To put it mildly, this style of politics comes with a huge price tag.
Predictably, the Kenyan public do not like what they see. 58.5% of respondents in the 2024 Afrobarometer survey believe that the country is trending in the wrong direction. 49% disapproved of President Ruto’s performance. 50.5% reported that Kenya’s economy is worse (29.3%) or much worse (21.2%) compared to 12 months ago.
Interestingly, 57.2% of respondents in the survey believe that the economy will be better (42.8%) or much better (14.4%) in 12 months’ time. Another interesting datapoint is the difference between overall perceptions of the national economy vs individual living conditions. While 60.7% of respondents consider the country’s economic condition condition to be fairly bad (27.8%) or very bad (32.9%), at the individual level the share of respondents is 48.7% (23.1% very bad, 25.6% fairly bad).
The gap between public perception of the overall economy and individual level living conditions, coupled with expectations of improvements a year’s time, is yet another mixed signal on the Kenyan economy.
II: When the demands of political survival overwhelm capacity for reforms
Over the last 15 years, the Kenyan government has been an important driver of economic growth — mostly through borrowing and investing in infrastructure projects. However, the appreciable upgrade of Kenya’s infrastructure stock was not accompanied by meaningful improvements in the business environment or in the organization of private firms. The resulting mediocre growth in productivity left the economy unable to muster enough growth to pay off the government debt. This is the fiscal problem Ruto inherited from Kenyatta.
The Ruto administration’s approach to solving the fiscal problem has two main flaws. First, the monomaniacal focus on revenue generation at all cost risks causing more harm than good. It certainly helped the country avoid default and paid for regime stability. The cost, however, has been inattention to pro-growth policies in the critical sectors of agriculture and manufacturing, as well as the quality of service provision (especially education, health, and water). Second, the administration has embraced informalization as the way out of the economic problems it inherited.
Part of this is attitudinal — the president and his advisers despise the “upper deck” middle class crowd that constantly excoriates the administration and have turned to promoting the informal sector as the “real” productive segment of society (notice that this isn’t the same thing as being a pro-poor populist).
The more important factor, however, is necessity. Kenyatta’s disastrous policies made it impossible to craft a revenue mobilization strategy that was dependent on formal sector growth. In other words, the Ruto administration had no recourse but to intensively mine informality for jobs, growth, and revenue — mostly through fitful policies targeting young people and women. The ongoing spread of informality (including in formal firms) in response to this strategy is hard to miss. And external pressure from the Bank and Fund to increase revenue and reduce the deficit is likely to deepen this trend. Instead of the process making more firms and economic activities legible and therefore incentivized to formalize, the current approach only focuses on revenue mobilization.
In 2024 the economy generated just over 782,000 wage jobs, only 10% (79k) of which were in the formal sector. The share of wage employment is trending in the wrong direction (see below). Real wages today are lower than they were in 2005.
Betting on informalization doesn’t hold much promise for firm size growth, linkages to global value chains, improvements in productivity, or a meaningful rise in wages (which is necessary to avoid entrenched inequality and a permanent duality in the labor market). Furthermore, the tight official embrace of informalization requires little discipline in policymaking. Instead of serious industrial policy, officials end up spending inordinate amounts of time and resources on dispersed, poorly planned, and highly distortionary projects. Indeed, it says a lot that the government has simply given up on domestic mass job creation and resorted to “labor export” as a strategy (also helps solve the forex problem).
I should also add that it is not easy for economies to escape the informality trap and that this is not a Ruto problem: the informal labor share has barely changed over the last two decades. The best way out seems to be assiduous regulatory enforcement regardless of firm size. However, this comes with economic and political costs. Only a foolish politician/policymaker would go about killing jobs, jeopardizing a decent growth rate, and angering potential voters in the midst of a slow-burning fiscal crisis.
III: Conclusion
Reforming the Kenyan economy was always going to be a heavy lift. Having inherited a fiscal crisis, the Ruto administration has spent the last 2.5 years scouring the economy for revenue. From an economic policy standpoint, it has been reactive rather than strategically proactive. The game appears to be to do whatever it takes to buy time as the economy navigates domestic political upheavals (see next two posts) and emerging external shocks.
Unfortunately, the specific tactics deployed to buy time — for example, the embrace of informalization, high levels of shilling-denominated domestic borrowing, aggressively distortionary revenue mobilization, sprinkled with half-baked interventions to keep the informal sector humming — will likely plant the seeds of future economic stagnation and political instability. Kenya’s young workforce needs lots of decent formal wage jobs in a thriving private sector. Which is to say that pushing them to self-employment/under-employment in the informal sector is a strategy with a very short shelf life and which will not kickstart the dynamism and productivity improvements needed to lift millions of Kenyans out of poverty.
Super interesting as always, Prof Opalo. Would be interested to hear you elaborate on what you mean by the government "embracing" / "promoting" informality/informalization? What policies are you referring to?
https://substack.com/@reeceashdown/note/c-129356314?r=5qrbeg&utm_medium=ios&utm_source=notes-share-action