The National Treasury building along Harambee Avenue, Nairobi /HANDOUT
High debt
servicing costs, weak governance and low revenue collection will see Kenya’s
budget deficit reach 5.2 per cent of Gross Domestic Product (GDP), far away
from the country’s target.
Global credit rating firm Fitch states that this will curtail the country’s economic growth, despite affirming its long-term creditworthiness at 'B-' with a Stable Outlook in late July.
The rating agency says that the projected budget deficit is way higher than the projected 'B' median of 3.6 per cent, attributed to slippage in FY25, when the deficit reached 5.8 per cent of GDP, 2.5 percentage points higher than the government's initial budget target as expenditure growth outpaced revenue.
The FY26 budget targets nearly one percentage point reduction in expenditure, to 22 per cent of GDP, but Fitch expects rising debt service costs, limited progress in strengthening spending controls and increasing social and security demands to limit planned reductions.
Fitch’s assertion on the country’s budget deficit- a measure of the government's income compared with its spending conflicts with the National Treasury, which anticipates much lower gaps after it avoided moving last fiscal year’s balances into the new cycle.
Speaking when he met the leadership of the Financial Journalism Society of Kenya (FJSK) a fortnight ago, National Treasury CS John Mbadi said the government aims to return to a path of fiscal consolidation while managing the pressures of prior spending and revenue shortfalls.
He projected revenue of Sh3.32 trillion and expenditures of Sh4.26 trillion for the 2025/26 cycle, with a reduced deficit of 4.7 per cent of GDP.
A deficit occurs when the government spends more than it taxes, and a surplus occurs when the government taxes more than it spends.
Furthermore, Fitch maintains a conservative revenue outlook for Kenya, consistent with the country’s record of underperformance and gaps in public financial management.
It projects total revenue to increase slightly to 17.2 per cent of GDP in FY26, remaining below the government's target of 17.5 per cent and 'B-' rated peers of 17.7 per cent.
“The new law does not introduce new taxes or raise headline tax rates, given strong public opposition and concerns over renewed violent social unrest.”
“Instead, it focuses on measures to strengthen tax administration, including digitisation initiatives, and reduce tax expenditures, which accounted for 3.4 per cent of GDP in 2023. However, we expect progress to be limited, due to high implementation risk and persistent revenue leakages.”
Kenya Revenue Authority (KRA) missed the collection target for the ended financial year to June 30, 2025, by Sh48billion, hurt by a tough economy.
Underperformance in revenue collection continued in FY25, estimated at 2.3 per cent of GDP below its initial target and 0.4 per cent of GDP below the supplementary budget III target.
This year, the exchequer targets Sh3.38 trillion in total revenue, a 10.6 per cent increase from the previous year, supported by a Sh2.835 trillion ordinary revenue target and Sh560 billion from appropriations in aid.
Key strategies to achieve this goal include expanding the tax base, improving compliance through reforms and technology, enhancing non-tax revenue, and reducing tax expenditures.
Fitch is also worried about the country’s rising debt obligation due to the government's increasing reliance on domestic financing and higher non-concessional borrowing.
"We expect interest expenditure to rise due to higher domestic issuance, with the interest/revenue ratio rising to 33 per cent in FY26 and FY27, from 31 per cent in FY24, well above the 'B' median forecast of 15 per cent."
It, however, estimates that government debt/GDP will drop to 66 per cent in FY25, from 71 per cent in FY23, mainly linked to a stronger shilling.
