The global economy is expected to slow in 2025, expanding between 2.8% and 3.0%, down from 3.3% in 2024, according to the Central Bank of Kenya’s Financial Sector Stability Report.
The projected deceleration comes despite inflation returning to target levels, with the CBK citing escalating trade tensions, protectionist policies, and heightened policy uncertainty as key contributors.
In 2024, global trade grew by 3.7%, supporting jobs, incomes, and supply chains worldwide. However, newly imposed U.S. tariffs on goods from 185 countries, and retaliatory measures by several nations, have cast a shadow over global trade prospects. The CBK warns that the resulting uncertainty is likely to curb trade and investment flows, particularly in developing economies.
Financial markets have not been spared. Market volatility rose sharply, with the VIX jumping from 12.8 in January 2024 to 20.3 in November, briefly easing to 14.9 in December before spiking to 43.5 in April 2025. Protectionist policies in both advanced and emerging economies are further constraining opportunities for value addition in primary goods, eroding the competitiveness of developing countries.
Policy uncertainty especially around taxation, fiscal consolidation, and public spending poses additional risks. Many economies continue to grapple with elevated debt levels accumulated during the COVID-19 period. While fiscal consolidation is needed, governments face political resistance to new tax measures and spending reforms. In advanced economies, particularly the U.S., rising spending needs in healthcare, education, and security are adding pressure to public finances, with spillover effects for developing countries reliant on grants and development assistance.
Geopolitical tensions in Central Africa, the Middle East, and the Russia Ukraine conflict continue to disrupt supply chains, raising transport costs and fueling price increases. Higher costs erode household purchasing power just as monetary policy remains tight to contain inflation. The delayed easing of interest rates is expected to keep borrowing costs elevated for both the public and private sectors, slowing investments and recovery.
The CBK notes that trade restrictions have broad implications for financial stability. Reduced market access weakens revenues for export-oriented firms and lowers household incomes, affecting their ability to meet financial obligations. Some multinational firms have begun shifting operations from high-tariff jurisdictions to more favourable environments, creating job losses and stock market volatility in affected countries.
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Emerging and developing economies especially those dependent on primary commodities face declining earnings and capital outflows amid global uncertainty.
Regionally, the East African Community (EAC) demonstrated resilience in 2024, growing by 13.6% on average, though slower than 16.4% in 2023. Tight monetary conditions and stricter lending standards moderated private-sector credit growth. Nonetheless, favourable weather boosted agricultural output, while public investment supported overall performance. The EAC is projected to grow by 8.8% in 2025, driven by recovering agriculture, easing inflation, and improved financial conditions.
The region’s financial sector remained broadly stable. Banking sector assets grew by 10% between 2023 and 2024, with liquidity and core capital adequacy rising above regulatory thresholds. However, asset quality weakened, with non-performing loans increasing from 6.2% in December 2023 to 7.3% in December 2024. Despite this, a higher coverage ratio from 42% to 44% and strong liquidity buffers indicate that the sector remains resilient. Regional stress tests show that banks can withstand moderate credit and exchange rate shocks.
The CBK emphasizes the need for a careful global policy balance: controlling inflation without stifling recovery. For Kenya, such stability would support export demand, remittances, and investment inflows while easing financial conditions.
However, emerging markets remain vulnerable to abrupt tightening in global financial conditions and reduced budgetary support from advanced economies undergoing fiscal reforms.
The CBK suggests that these challenges present an opportunity for EMDEs to enhance fiscal discipline, reduce reliance on external grants, and strengthen regional trade integration.
By Obegi Malack
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