Kenya's economic ambitions are significantly hampered by weak private sector investment and a persistent vulnerability to both internal and external shocks. These challenges directly impact job creation, economic diversification, and the nation's overall resilience.

Weak Private Sector Investment-

Private sector investment in Kenya has faced headwinds, impacting its ability to be a robust engine of economic growth.

• Credit Contraction and High Lending Rates: A primary concern is the limited access to affordable credit. The Central Bank of Kenya (CBK) adopted a tighter monetary policy in 2024 to combat inflation and stabilize the shilling, leading to higher interest rates. This resulted in a significant contraction of credit to the private sector. By December 2024, private sector credit growth had plunged to -1.4% from 13.9% in December 2023. While the CBK began easing its monetary policy in late 2024 and early 2025, lowering the Central Bank Rate (CBR) from 13.0% in June 2024 to 10.75% in February 2025 and further to 9.75% in June 2025, commercial banks have been slow to lower their lending rates (averaging 16.4% in February 2025). This reluctance, partly due to elevated non-performing loan (NPL) levels, continues to deter businesses and households from borrowing, thus stifling investment.

• Heavy Reliance on Bank Financing: Kenyan businesses, unlike those in developed economies, rely heavily on commercial banks for financing (around 95% of their funding), with minimal access to alternative financing options such as venture capital, equity financing, or government-backed credit programs. This limited diversification of funding sources makes the private sector particularly susceptible to changes in bank lending policies and interest rates.

• Fiscal Consolidation and Crowding Out: The government's significant domestic borrowing to finance its budget deficit has often "crowded out" the private sector from the credit market. When the government borrows heavily, it increases demand for funds, pushing up interest rates and making it more expensive for private businesses to access loans. Although the government aims to reduce its fiscal deficit, the proportion of domestic financing is still projected to remain high in FY 2025/26, potentially heightening the risk of crowding out.

• Policy and Regulatory Uncertainty: Changes in taxation policy, as seen with the Finance Bills of 2024 and 2025, create uncertainty for investors. The public outcry and subsequent government revisions or withdrawals of controversial clauses create an unpredictable business environment that deters long-term investment. Additionally, regulatory hurdles and bureaucratic processes, while being addressed by government initiatives, can still be a deterrent.

• Slowdown in Key Sectors: Several key sectors critical for private investment have experienced a slowdown. Manufacturing investment, for instance, has stalled due to high borrowing costs. Smaller banks are reporting rising non-performing loans, particularly in unsecured lending, eroding their capital buffers. Projects in mining and construction have been shelved or delayed, further impacting employment in these sectors. Even sectors like horticulture and textiles face margin pressures due to rising financing costs.

Vulnerability to Internal and External Shocks-

Kenya's economy and private sector are highly susceptible to a range of shocks that undermine investment confidence and economic stability.

• Internal Shocks:

  • Political Instability and Protests: The widespread protests witnessed in June 2024 and June 2025 have a direct negative impact on business sentiment and investment. Economic activity slows down during periods of civil unrest, disrupting supply chains, deterring customers, and creating an uncertain outlook for businesses. The World Bank noted that Kenya's GDP growth slowed in 2024 partly due to public discontent over tax hikes and sluggish private investment. Political uncertainty is a significant factor negatively affecting private domestic investments.

  • Climate Variability: Kenya's economy is heavily reliant on agriculture. Erratic weather patterns, including delayed or insufficient rainfall, can significantly undermine agricultural output, impacting export earnings, rural incomes, and overall food security. This directly affects agribusiness, a critical area for private investment.

  • Corruption: Pervasive corruption introduces significant risks and costs for businesses, deterring both domestic and foreign investment. The lack of transparency and accountability in public fund management creates an uneven playing field and increases the cost of doing business.

• External Shocks:

  • Global Monetary Tightening: Further interest rate rises by major central banks globally could widen funding costs for Kenya and dampen remittance flows, a crucial source of foreign exchange.

  • Geopolitical Tensions and Commodity Prices: Geopolitical tensions globally can lead to elevated commodity prices, particularly for oil (a significant import for Kenya), which then tightens financial conditions, weakens external balances, and fuels inflation.

  • Global Economic Slowdown: A lower-than-anticipated growth in developed countries could undercut recovery in key sectors like Kenyan tourism and exports, and reduce diaspora remittances, all of which are vital for foreign exchange inflows and economic activity.

  • Shifts in Foreign Direct Investment (FDI) Trends: While Africa as a continent saw an increase in FDI in 2024, UNCTAD data for early 2025 indicates a global decline in FDI, with significant regional and sectoral divides. Kenya, along with other countries, has been "held back due to rising debt levels alongside regulatory uncertainty," contributing to a decline in its FDI. Kenya's FDI fell to $335 million in 2024 from $710.2 million in 2023, a significant drop. This reflects broader economic and regulatory challenges, as well as global competition for capital.

Government Initiatives and the Outlook-

The Kenyan government recognizes the importance of private sector investment and is attempting to implement measures to address these challenges:

• Bottom-Up Economic Transformation Agenda (BETA): This agenda aims to create an enabling environment for businesses and investment, with a focus on promoting investment in key value chains like agriculture, MSMEs, housing, healthcare, and the digital economy.

• Privatization Program: President Ruto has announced plans to privatize certain state assets through initial public offerings to attract more private sector investment.

• Improving Ease of Doing Business: Efforts continue to streamline business registration processes and reduce bureaucratic hurdles.

• Public-Private Partnerships (PPPs): The government aims to scale up the use of PPPs for commercially viable projects to crowd in the private sector in public service provision.

• Strategic Plan 2023-2027: Launched in May 2024, this plan aims to significantly enhance Kenya's attractiveness for foreign investment, targeting an increase in FDI from $500 million in 2022 to $10 billion by 2027. This includes enhancing the business environment, developing Special Economic Zones, and fostering an investor-centric culture.

Despite these efforts, the World Bank has trimmed its forecast for Kenya's economic growth in 2025 to 4.5% (from 5.0%), citing heavy government borrowing, elevated lending rates, and the contraction in private sector credit. A recovery to around 5.0% is projected for 2026-27, contingent on stable weather and continued reforms. The success of these reforms, particularly in addressing the debt burden, improving the credit environment for the private sector, and ensuring political stability, will be crucial for attracting the necessary investment to drive Kenya's economic growth and create jobs for its young population.