Why do economies crash when they seem fine?

Why do some economies crash overnight? Often, the seeds are planted in overlooked debt cycles, inflated optimism, or blind faith in “too big to fail.”​

In 2024, Kenya's economy, once hailed for its resilience, faced a series of challenges that tested its stability. Despite a projected GDP growth of 4.7% for the year, down from 5.6% in 2023, the nation grappled with mounting public debt, social unrest, and external shocks that exposed underlying vulnerabilities. ​World Bank Group

The Debt Trap

Kenya's public debt surged to approximately 10.6 trillion Kenyan shillings (about $82.5 billion) by mid-2024, representing around 71.8% of its GDP.  This significant debt accumulation, nearly doubling from 41% of GDP in 2014, was driven by extensive borrowing for infrastructure projects and budgetary support. 

In June 2024, Kenya faced a critical deadline to repay a $2 billion Eurobond issued in 2014. To avert default, the government secured a $941 million loan from the IMF and issued a new $1.5 billion bond at a steep 10.4% interest rate.  While these measures provided temporary relief, they underscored the nation's precarious fiscal position.​

Social Unrest and Policy Backlash

The government's attempt to implement the Finance Bill 2024, aiming to raise 346 billion shillings through new taxes, sparked widespread protests. The bill proposed levies on essential goods, including bread and sanitary products, exacerbating the cost-of-living crisis.

The protests, led predominantly by the youth under the #RutoMustGo movement, highlighted deep-seated frustrations over economic hardships and governance issues. The unrest resulted in at least 41 deaths and significant political pressure, leading President William Ruto to withdraw the bill and announce a 999 billion shilling budget cut. ​

External Shocks and Economic Slowdown

Kenya's economy also contended with external challenges. Devastating floods in May 2024 impacted key regions, including Nairobi, leading to a projected 0.3 percentage point reduction in GDP growth.  Additionally, global economic factors, such as the lingering effects of the COVID-19 pandemic and geopolitical tensions, disrupted supply chains and inflation dynamics. ​S&P Global

Consequently, the country's economic growth decelerated, with Q3 2024 recording a 4.0% year-on-year growth, one of the lowest since the pandemic's onset. ​

Comparative Insights: Ghana and Nigeria

Kenya's experience mirrors challenges faced by other African nations. Ghana, for instance, defaulted on its debt in 2022 after its public debt exceeded 80% of GDP, leading to severe austerity measures and social unrest.

Similarly, Nigeria grappled with high inflation rates, reaching over 34% in 2024, following the removal of fuel subsidies and currency devaluations. These policy shifts, while aimed at economic stabilization, intensified public dissatisfaction and protests.

Lessons and the Path Forward

Kenya's economic challenges underscore the importance of prudent fiscal management, transparent governance, and inclusive policy-making. Addressing structural imbalances, diversifying revenue sources, and fostering public trust are crucial for sustainable economic resilience.​

As Kenya navigates its economic crossroads, the experiences of its peers highlight the need for comprehensive reforms that prioritize both economic stability and social equity.