Kenya risks missing its fiscal consolidation targets in the medium term due to its inability to cut its fixed recurrent budget costs, undermining the country’s ability to invest in job-creating development projects amid depressed revenue growth.
In its recently released Kenya economic update report, the World Bank said widening fiscal deficits, persistent revenue underperformance, rising pending bills, heavy reliance on local borrowing, and growing public debt have all contributed to weakening Kenya’s fiscal position, stalling the positive momentum seen in the initial post-pandemic period when the country cut its budget overrun.
In the year to June 2025, the Treasury saw its fiscal deficit as a percentage of GDP hit 5.9 percent, compared to the target of 4.3 percent that was set in the last of its supplementary budgets for the period.
“These repeated fiscal slippages continue to undermine the credibility of Kenya’s fiscal policy; over the last two years, the fiscal deficit has, on average, exceeded projections by 1.3 percent of GDP.” The World Bank defines rigid expenditures in the budget as “institutional, legal, contractual, or other constraints that limit the ability of governments to change the size and composition of the public budget, at least in the short term.”
The share of these kinds of expenditure, which include public sector wages and debt service costs, stands at 56.4 percent of total expenditure, and the equivalent of 75.8 percent of revenue, inclusive of grants, as per World Bank estimates.
Given the difficulties in cutting the rigid expenditure, the government has instead been opting to cut its development spending.
In the 2024/2025 fiscal year, development spending declined to 3.4 percent of GDP from 3.5 percent a year earlier (despite a larger total budget), and was well below the 7.9 percent share seen a decade ago.
Development projects have traditionally been the main casualties of budget cuts whenever successive governments seek to realign expenditure through supplementary budgets to cater for programmes that were not approved in original budgets, amid the perennial shortfalls in revenue estimates.
Treasury officials have, at the same time, argued that there is usually little room to cut the recurrent votes on items such as wages and maintenance costs for public offices.
At the same time, lower than projected revenue performance has tended to force the government to make upward revisions in its annual borrowing targets, effectively adding to the cost of servicing debt going forward.
In the 2024/2025 fiscal year, the Budget Statement had set the initial deficit and borrowing target at Sh597 billion, which was to be financed through domestic borrowing of Sh263.2 billion, and external funding worth Sh333.8 billion.
Three revisions through supplementary budgets followed, which saw the deficit for the year eventually settle at Sh1.034 trillion, financed through domestic borrowing of Sh854.5 billion and external borrowing of Sh179.7 billion.
