- Kenya plans a FY2026/27 budget of Sh4.64 trillion against projected revenue of Sh3.487 trillion, leaving a Sh1.1 trillion gap to be funded mainly through domestic borrowing.
- Despite improved inflation, FX stability, and reserves, revenue is missing targets and debt-service costs consume about one-third of tax receipts, keeping debt distress risks high.
- The World Bank estimates reforms could cut the debt path and raise efficiency via broader taxation, fewer exemptions, better compliance, subsidy and wage-bill rationalization, and stronger SOE/procurement governance.
- Political pushback to new taxes and underfunding in sectors like agriculture are pushing the government toward asset sales and PPPs to finance infrastructure and green investment.
Read More
Kenya faces a fiscal crossroad. On one hand, it’s committed to increasing the scale of government services and development (as seen through its large Sh4.64 trillion proposed budget for 2026/27) along with sizable allocations to counties and national priorities. On the other hand, its capacity to finance this—through tax revenue, borrowing, or asset sales—is constrained by structural weaknesses, public resistance to tax hikes, and already high levels of debt.
Revenue shortfall & rising borrowing: Projections anticipate revenue of Sh3.487 trillion for 2026/27 (inclusive of A-in-Aid), with ordinary revenue expected to be Sh2.9 trillion. But Yemen’s Kenya Revenue Authority (KRA) is already underperforming: in early FY 2025/26, collections were below target by ~Sh100 billion. To hit the target, Kenya will need ~Sh7.95 billion per day including weekends.
Debt risk & cost of servicing: Debt service obligations are straining public finances. Interest payments already absorb around one-third of tax revenues. Without reforms, continued borrowing for recurrent expenditure and a large deficit (projected deficits above 3 % of GDP) threaten fiscal sustainability.
Potential reform paths: The World Bank’s Public Finance Review (2025) lays out pathways that yield savings of ~4 % of GDP from revenue reforms and ~1.7 % from expenditure reforms. Revenue side options include rationalizing tax exemptions, formalization, property tax improvement, and compliance. On spending side: wage bill reform, subsidy rationalization, better management of SOEs.
Trade-offs & political constraints: Previous tax reform attempts (e.g. Finance Bill 2024) triggered protests; the government later vetoed some tax proposals. Asset sales (like Safaricom’s stake) are controversial but politically more acceptable than tax hikes.
Sectoral underinvestment: Agriculture is particularly underfunded, with about half its requested budget granted. Key flagship programs in agribusiness, climate resilience, and livestock development may suffer. Meanwhile, green and infrastructure investment is being prioritized through policy operations and public-private partnerships, and climate finance flows.
Strategic implications: Without structural reforms, Kenya risks debt distress, investor loss of confidence, crowding out of essential spending, and social instability. But successful implementation offers growth, job creation, poverty reduction, and restoration of fiscal credibility. Monitoring, transparency, and public engagement will be essential to maintain political legitimacy.
Open questions include: (1) Can KRA sustainably ramp up revenue without further sparking public backlash? (2) What size and structure should the asset sales program be—and how to ensure proceeds are transparently used for infrastructure? (3) How will rising global interest rates or external shocks (climate, trade) affect Kenya’s outlook? (4) What reforms in expenditure efficiency can be politically implemented (wage bills, SOEs, procurement)?
Supporting Notes
- The government projects a FY 2026/27 budget expenditure of KSh4.64 trillion with revenue (including Appropriation-in-Aid) of KSh3.487 trillion, leaving a KSh1.1 trillion financing gap.
- Ordinary revenue for FY 2026/27 is expected to be KSh2.901 trillion (≈13.9 % of GDP), up from KSh2.754 trillion (≈14.5 % of GDP) in FY 2025/26.
- Revenue collection in the early months of FY 2025/26 was ~KSh942 billion vs target KSh1.049 trillion—a shortfall of ~KSh107 billion.
- Interest payments consume ~one-third of all tax revenue; Kenya remains at high risk of debt distress. Growth projected to rise from 4.5 % in 2025 to ~5.0 % in 2026-27.
- Agriculture sector requested Sh106 billion but was allocated Sh58.2 billion, well under the 10 % commitment following Malabo Declaration. Key funded programs are severely under-resourced or unfunded.
- World Bank estimates that revenue reforms could add ~4 % of GDP, and expenditure reforms ~1.7 % of GDP in savings; additional social protection, health, and education investments would require about 0.3 %-3 % more GDP annually.
- The government has begun selling a US$1.58 billion stake in Safaricom, increasing Vodacom’s share to 55 %, keeping 20 % stake and retaining board influence. Proceeds will seed a national infrastructure fund.
- The FY 2025/26 Cabinet-approved budget amounts to KSh4.2 trillion; recurrent expenditure KSh3.09 trillion, development spending Sh725.1 billion, counties Sh405.1 billion.