Paul Arithi 
The Financial Stability Report 2023 provides an assessment of developments and risks that Kenya’s economy and financial sector faced in 2023 and during first half of 2024.
Globally, the period experienced high inflationary pressures triggering strong and faster pace of monetary policy responses by advanced countries.
This came on the backdrop of a reversal from a long period of very low interest rates, low volatility, and ample liquidity, associated with sustained accommodative monetary policy in advanced economies.
The strong and faster pace of monetary policy tightening resulted in steep rise in interest rates, causing unexpected and unintended impact on financial sector.
The institution with a large proportion of debt in their asset portfolio and those that relied on debt and money markets to meet their liquidity needs were most affected.
This exposed institutions to liquidity, duration, and credit risks.
In addition, risks spillovers to Emerging Markets and Developing Economies (EMDEs) was significant, causing
increased vulnerabilities across many countries.
Climate change risks to the financial sector and overall economy also increased in frequency, intensity and geographical coverage.
There were more cases of prolonged droughts, heavy flash floods and mudslides, and severe storms including typhoons and hurricanes across many parts of the world.
These came with significant physical and transition/or liability risks to the financial sector, increasing vulnerabilities given the limited fiscal space to mitigate the effects
and/ or adaptation.
A combination of policy uncertainties, vagaries of climate change events and impact of monetary policy tightening on economies and wellbeing led to socio-political unrests in most affected areas, culminating into reversals and/climbdown on pursuit for tight fiscal and monetary policies that raised economic and financial stability concerns.
Domestically, Kenya’s economy was resilient to domestic and global shocks, expanding by 5.6 percent in 2023 compared to 4.9 percent in 2022.
The growth was on account of robust
growth of service sectors, mainly transport and storage, financial and insurance, information and communication, and accommodation and food services.
Agriculture also recorded strong
recovery due to conducive weather, thus contributing to the expansion.
The economy grew by 5.1 percent and 4.6 percent in the first and second quarters of 2024, respectively.
Growth is projected at 5.1 percent in 2024 and 5.5 percent in 2025, reflecting robust performance of agriculture and resilience of key service sectors.
This is underpinned by favourable weather conditions, conducive policies and easing financial conditions.
Downside risks to this growth include narrow fiscal space owing to high public debt and enhanced fiscal consolidation, slow pace of monetary policy easing, tight liquidity conditions in the international market, unpredictable weather patterns and political risks.
Additionally, tightening lending standards may reduce credit uptake, which is to support economic growth and contributing to financial sector stability through earnings [not clear because less credit should undermine economic growth not support it].
Overall, Kenya’s financial system was sound, stable and resilient to interest rates shock, exchange rate depreciation, elevated credit risk, decline in stock prices and high inflation in 2023.
The banking sector had sufficient capital and liquidity buffers and strong earnings in 2023.
The sector however recorded elevated credit, interest rate and operational risks.
The microfinance banks incurred losses and were thinly capitalised during the period. Capital markets were characterised by decline in equity and bond prices, with significant scale-down by foreign investors and inactive corporate bonds market.
This negatively impacted the returns on investment for the pension sector, which also recorded decline in member contributions.
Return on investment and gross premiums in the insurance sector improved.
However, claims paid exceeded premiums received,i ndicating mispricing of risks. In addition, the sector recorded an increase in cases of technology related crimes.
Assets quality and profitability of Saccos improved in 2023 despite high cost of
living experienced by members.
The Financial Markets Infrastructure continue to play its vital facilitative role, ensuring that payments and settlements are concluded efficiently and effectively.
It completely altered the government securities market landscape in terms of purchase and sell of securities in both primary and secondary markets.
This is expected to contribute to financial
sector deepening, inclusion and stability.
The resilience of the Kenyan economy is expected to contribute to financial sector soundness and stability in 2024, with adequate capital and liquidity buffers.
This is to be complemented by well-coordinated policy reforms, a robust regulatory oversight and monetary policy easing on inflationary pressures.
On regulatory front, the Central Bank of Kenya (Amendment) Act No 10 of 2021 that brought previously unregulated digital lenders under CBK’s regulatory armpit and operationalisation of non-withdrawable deposit taking SACCO regulations are expected to enhance stability and growth of digital credit providers and SACCOs, respectively.
The downside risks to the strong growth and sustained financial sector stability in 2024, however, remain.
The higher-for-longer interest rates environment, the ever-evolving technology-related risks, climate change risks and geopolitical conflicts and geo-economic fragmentation may have implications on the domestic economy and the financial sector outlook.
A careful policy balancing involving monetary tightening/easing to deal with inflation, fiscal consolidation measures to address public debt sustainability concerns and regulatory reforms should converge towards achieving a stable macro-financial environment in 2024 and beyond.
Use of appropriate policy tools to address financial stability concerns separate from those targeting monetary policy objectives, clear communication on the intended objectives, enhance risk assessment,and corporate governance commensurate with risk profile of the sector are areas of priority
ECONOMIC AND FINANCIAL CONDITIONS;
Global Conditions and Risks
The global economy remains resilient to sticky inflation, higher-for-even longer interest rates, geopolitical conflicts and geoeconomic fragmentation.
The April 2024 IMF WEO estimated the global economy to have grown by 3.3 percent in 2023 and is projected at 3.2 percent in 2024 (Figure 1). The UN WESP-Mid 2024 however, projects global economic growth of 2.7 percent in 2024 while the World Bank’s Global Economic Prospects of June 2024, projects the global growth of 2.6 percent in 2024.
The 0.7 percentage points gap between the IMF growth scenario and that of the World Bank may reflect differences in the severity and persistence of shocks to global economies in 2024.
Despite the divergence in the growth scenarios, there is consensus that overall global growth remains resilient to multi-shocks environment.
It however must navigate the stubbornly high global inflation, which monetary authorities have responded by increasing policy rates, this has resulted into an environment of higher-for-even-longer interest rates..
This is expected to maintain and/or heighten external, fiscal, and financial risks, with EMDEs, being the most affected.
The EMDEs with narrowing fiscal space are likely to face limited access to international capital, experience increased debt service costs on their existing debts, high refinancing risks of maturing debt and reduced liquidity.
These have implication on their debt sustainability position and financial stability.
Political and policy uncertainties persist, with implication on global economy and financial stability.
Escalation in war pitting Israel against Hamas-Iran-Houthis-Hezbollah axis, could disrupt global trade on reduced shipping activities and/or increased freight insurance costs, with passthrough in global commodity prices.
This could contribute to elevated inflation, thus maintaining interest rates higher for even longer.
