World Bank projects economy to grow at 4.9pc next year, 5pc in 2026

Despite Kenya’s economy gaining momentum in recent years, the gains are not enough to create sufficient formal employment, with new World Bank data showing real incomes have declined over the past decade.

The data shows the glut of low-quality informal jobs is failing to meet the aspirations of the fast-expanding youth population, known as Gen Z.

The Kenya Economic Update, released yesterday, projects that the economic growth will accelerate to 4.9 per cent in 2026, up from a previous forecast of 4.5 per cent, citing stable inflation, record foreign exchange reserves, and a resurgent construction sector.

The report confirms the long-held contrasting dual narrative for Kenya’s economy as touted by President William Ruto’s government, pointing to a stronger macroeconomic recovery on one hand, and persistent fiscal vulnerabilities and a worsening jobs crisis on the other, as being felt by many Kenyans, which has left many, particularly the youth, feeling disillusioned.

The report’s findings come at a sensitive time for President Ruto as he puts on a bold face about the economy’s turnaround under his stewardship, over two years since he ascended to power.

This is amid sustained public pressure to translate his economic pledges into tangible improvements in livelihoods and real incomes for ordinary Kenyans. “Two things can be true at the same time.

The coin always has two sides,” said the World Bank’s Country Economist for Kenya Jorge Tudela Pye, during his presentation of the report in Nairobi.

Pye outlined several positive indicators fueling the upgraded growth forecast by the World Bank. Inflation, or the cost of living measure, which peaked at 6.9 per cent two years ago, has cooled and remains within the central bank’s target range, settling at 4.7 per cent as of October.

Official foreign exchange reserves have surged to a historic high of around $12 billion (Sh1.56 trillion), up from $7 billion (Sh900 billion) two years ago, providing a critical buffer against external shocks and boosting investor confidence.

“The monetary policy transmission mechanisms seem to be working,” Pye said, noting that the Central Bank of Kenya’s (CBK) rate cuts have slowly translated into lower lending rates and a recovery in private sector credit growth. 

Cement consumption

This has improved the business environment, reflected in a Purchasing Managers’ Index (PMI) that has returned to expansionary territory after a mid-year contraction. Key sectors are also showing resilience. Agriculture grew at 5.2 per cent in the first half of 2025, while services expanded at 5.2 per cent.

A notable surprise was the recovery of the construction sector, which contracted in 2024 but grew by 4.3 per cent in the first half of this year, driven by increased cement consumption. 

A sharp expansion in cement consumption has coincided with the ramping up of the Kenya Kwanza government’s affordable housing programme, a pillar of President Ruto’s agenda to tackle a chronic housing shortage. 

The surge in demand, noted in the World Bank’s latest economic update, points to a boost in construction activity driven by the State-backed initiative, even as other sectors of the economy face significant headwinds.

The “other side of the coin,” as Pye termed it, is defined by persistent fiscal challenges. Government revenues have consistently underperformed targets, with an average “slippage” of 6.1 per cent over the last three years.

Fiscal slippage occurs when a government misses its own budget targets, often by spending too much or collecting too little revenue. 

For the Kenya Kwanza government, this failure forces it into a difficult choice, as it must either borrow more money, increasing its already heavy debt burden, or impose painful austerity measures like spending cuts.  For investors, this pattern signals the government’s inability to manage the economy effectively, as alleged by the country’s opposition, eroding confidence and likely leading to higher borrowing costs for the country. 

For ordinary Kenyans, it often means they ultimately bear the brunt, facing the prospect of higher taxes, reduced funding for essential public services like healthcare and education, or a higher cost of living as the government’s financial troubles ripple through the economy.

The country’s opposition has accused the Ruto regime of mismanaging the economy, leading to what it says is a lower quality of living for Kenyans.

Formal wage

The World Bank addressed the disconnect between economic growth and job creation, a central source of public discontent. “The real question that we’re trying to ask ourselves here is if growth is translating to improved living conditions for Kenyans, more and better jobs, and rising incomes,” said Pye.

The data shared by the World Bank suggests it is not. While total employment has grown at an average of 3.9 per cent over the past decade, the Bretton Woods institution found that almost all this growth has been in informal, “lower quality jobs.” Formal wage employment grew at less than 1 per cent annually over the same period.

Compounding the problem, the average real wage per worker has plummeted by 10.7 per cent in the last ten years. “This means that most workers who are joining the labour force, especially the youth, are obtaining informal, lower-paying, unproductive jobs,”  Pye explained.

This analysis underscores the challenges facing Kenya’s vast youth population, popularly known as Gen Z, for whom stable, formal employment opportunities remain scarce. 

The findings give empirical weight to the growing sense of frustration that has fueled recent discontent demanding Ruto’s government action on the cost of living and unemployment.

During his State of the Nation address last week, President Ruto put on a brave face as he painted a lofty picture of the state of the country’s economy two years after he took office, amidst the persisting high cost of living and unemployment.

Speaking before a joint session of Parliament, Ruto said he has transformed his 2022 vision into reality, telling MPs and Kenyans he now has a story to tell.  

According to the President, his major successes include growth in the industrial and agricultural sectors, low inflation, a strong Shilling, as well as affordable housing, all of which he said have created job opportunities for youths.  

“n just three years, we have built not monuments of words, but foundations of progress. And yet, even with these achievements, I am convinced that this is only the beginning,” he said. 

He insisted that the high cost of living has come down after the government reduced the cost of food.

The report, however, urges the Ruto government to move beyond austerity measures alone, which can have difficult economic and social consequences, and implement deeper structural reforms aimed at boosting productivity and unlocking the creation of more and better jobs.

The World Bank projects Kenya’s GDP growth to hold steady at 4.9 per cent for 2026 and reach five per cent by 2027, but cautions that these projections are subject to risks, including continuous fiscal slippage and climate-related shocks.

The World Bank said that “deeper structural reforms are needed” to unlock productivity growth that translates into higher real wages and better living conditions for Kenyans.

The Kenya Kwanza government has consistently collected less tax money than it planned, as captured in the World Bank report, causing it to spend significantly more than it earned. 

This recurrent revenue shortfall caused the fiscal deficit for the 2024/25 financial year to widen to 5.9 per cent of GDP, above the targeted 4.3 per cent.

To cover the shortfall, the government is borrowing more from local banks, but this makes it harder to repay its debts and leaves less money for businesses and individuals to borrow, hurting private investment.

Consequently, public debt remains a key vulnerability, standing at 68.8 per cent of GDP. The World Bank emphasised that “fiscal consolidation is critical to boost growth,” but warned that “austerity measures alone are not enough.”

“Without more ambitious reform, especially on the revenue side, debt and fiscal vulnerabilities are likely to persist,” Pye stated.