High electricity tariffs and costly business registration continue to deter investment in Kenya, according to the African Development Bank’s (AfDB) newly released Kenya Country Focus Report 2025. The report warns that these structural barriers are stifling business growth and threatening the country’s long-term economic competitiveness.
The AfDB notes that business capital expansion is being constrained by high levels of informality, expensive electricity, priced at USD 0.15 per kilowatt-hour, and a burdensome business registration cost equivalent to 15% of Kenya’s Gross National Income (GNI) per capita. Poor infrastructure further aggravates the investment climate.
Micro, small, and medium enterprises (MSMEs), which make up 75% of Kenya’s private sector and contribute 40% of GDP, face additional challenges such as limited access to credit due to high interest rates, collateral requirements, low financial literacy, and poor rural banking infrastructure. The report also notes that government-run initiatives like Uwezo and Hustler Funds are insufficient to meet start-up financing demand.
The AfDB recommends several policy reforms, including expanding affordable financing options, digitizing community-based table banking, simplifying business regulations, lowering service fees, and increasing awareness of funding programs.
The report further criticizes weak institutions, corruption, and capital flight as significant barriers, along with state capture and a sluggish, often compromised judicial system. Kenya’s unpredictable tax policies, including recent increases in capital gains tax and new levies on digital assets, also undermine investor confidence, the AfDB says.
To improve the business climate, the lender urges Kenya to adopt mobile-based tax filing, cut non-essential public expenditure, and refinance high-interest debt using concessional loans. It also proposes formalizing the informal sector, streamlining tax compliance through digital tools, and eliminating inefficient tax incentives.
Despite these challenges, Kenya’s economy grew by 4.9% in Q1 2025, driven by gains in agriculture and manufacturing. The Kenya National Bureau of Statistics reported that the economy expanded by 4.6% in 2024, down from 5.6% in 2023, due to weak industrial activity, climate shocks, and reduced investment.
Looking ahead, the AfDB projects potential economic gains in 2025, supported by improved weather, macroeconomic stability, lower lending rates, and declining global oil prices. However, downside risks persist, including potential reversals in tax reforms, reduced donor support, and escalating global trade tensions.
To sustain growth, the report recommends scaling up value addition in agriculture, mining, and renewable energy; increasing seed funding for credit guarantees from KES 100 million to KES 5 billion; simplifying MSME regulations; and deepening capital markets through green and SME bonds.
The National Treasury projects economic growth of 5.3% in both 2025 and 2026, backed by a stable macroeconomic environment and targeted reforms.
Written By Rodney Mbua
