An overview of the effects of monetary policy in Kenya on GDP and inflation, from 1967 to the present day.

% annual growth rate:

  M3 Nominal GDP
1967-2022 15.49% 14.31%
1967-1970 16.98% 8.34%
1971-1980 17.20% 16.87%
1981-1990 13.91% 13.81%
1991-2000 19.87% 17.51%
2001-2010 14.25% 12.84%
2011-2020 13.37% 13.14%

Sources: M3 from IMF database and nominal GDP from IMF database, as at September 2023

The medium-term relationship between money and nominal GDP growth in Kenya, 1967-2022

Five-year moving averages of annual % changes, with 1969 being the start of the first five-year period

Comment on monetary trends in Kenya

Kenya was granted independence by Britain in 1963. At the time the country was part of the East African Currency Union. Although as in pre-decimalisation Britain, the common currency consisted of 20 shillings to the pound, in East Africa, the shilling rather than the pound was regarded as the primary unit. Furthermore, unlike the British shilling, it was subdivided into 100 cents rather than 12 pence. In 1966, the East African Currency Board broke up and Kenya replaced the East African Shilling with a new Kenyan Shilling at par. The new currency, however, was pegged to the US dollar until 1994 after which it was allowed to float freely. For some years, there have been plans afoot to create a new East African Currency Union involving Kenya, Uganda, Tanzania, Burundi, Rwanda and South Sudan. A new East African shilling was due to be launched initially in 2012 and then 2015, but without success. The current target date is 2024.

The Kenyan economy is one of the most open in sub-Saharan Africa. Upon independence, the country's leadership decided to avoid central planning but in the late 1970s, concerns that Kenyan industry was uncompetitive led to heavy government intervention including tight import and foreign exchange controls.  Between 1990 and 1992, real GDP declined steadily while broad money and inflation both rose sharply due to massive credits extended by the Central Bank of Kenya and continued difficulties in government budgetary management and inefficiencies in the public enterprise sector,   This resulted in a crisis in 1993 when annual broad money growth rose to almost 40% and inflation shot up to no less than 100%. This was followed by a substantial programme of liberalisation, aided by the World Bank and the International Monetary Fund. Foreign exchange controls and price controls were ended and a number of state-owned industries were privatised. The economy is also diverse compared to other African economies, including agriculture, forestry, fishing, mining and manufacturing. It also has a well-developed tourism industry and an important financial services sector. In 2020, Kenya boasted the third largest economy in sub-Saharan Africa after South Africa and Nigeria.

The Central Bank of Kenya was founded in 1966 when the country introduced its own currency. Its primary responsibility is formulating and implementing monetary policy to achieve stability in the general price level. It is also responsible for supervising Kenya's commercial banks. The central bank's website does not mention a specific inflation target, but does recognise the relevance of money growth to the wider economy:- "The Central Bank of Kenya regulates the growth of money stock that is consistent with a predetermined economic growth target as specified by the Government and outlined in its Monetary Policy Statements." It has often had to battle to keep inflation under control. Beside the inflationary episode in 1993, inflation rose above 30% in the latter half of the first decade of the 21st century and there have been two further periods where inflation rose above 10%. On every occasion these inflationary spikes have followed on the back of high broad money growth.

In common with many other countries in sub-Saharan Africa, Kenya has not suffered as greatly from the coronavirus pandemic as the nations of Europe. Its GDP grew in 2020 in spite of a sharp decline in tourism and the imposition of curfews and internal travel restrictions. The government cut taxes and introduced a number of fiscal support measures while the Central Bank reduced both interest rates and cash reserve ratios for banks.

Broad money growth rose to double digit levels in 2020 but has since moderated.  The annual inflation rate nonetheless rose to a five-year high of 9.6% in October 2022. It has since fallen but the central bank has been aggressively raising the cost of borrowing in a desire to bring it down further.