The share of the government’s borrowed funds ring-fenced for development projects has fallen to the lowest level in more than a decade, exposing increased reliance on debt to fund recurrent spending such as salaries and wages amid perennial shortfalls in tax collection.
Treasury data shows that the government spent Sh582.9 billion on development projects in the fiscal year to June 2025, equivalent to 56.4 percent of the net borrowings of Sh1.03 trillion from domestic and external lenders in the period.
This means that the Treasury used Sh451.3 billion or 43.6 percent of the borrowed funds to finance recurrent budget items such as salaries for civil servants, debt repayment, and pensions, as per the draft 2025 budget review and outlook paper. This marked a sharp increase from 33.2 percent the previous year.
Using borrowed funds to finance recurrent expenditure is in direct contravention of the Public Finance Management Act, which stipulates that “over the medium term, the national government’s borrowings shall be used only for the purpose of financing development expenditure and not for recurrent expenditure”.
While the government has continually flouted this rule since 2017, the ratio of borrowings being diverted to the recurrent vote jumped sharply in the last fiscal year, which resulted from lower-than-expected absorption of funds in development projects and increased borrowing from the domestic market.
“Development expenditure amounted to Sh582.9 billion against a target of Sh602.1 billion, translating to an underspending of Sh19.1 billion. This variance was largely driven by lower-than-projected absorption in development projects (net), which underperformed by Sh21.5 billion,” said the Treasury in the budget review document.
In the 2023/2024 fiscal year, the government’s development spending stood at Sh546.4 billion, which was equivalent to 66.8 percent of the net borrowing of Sh818.3 billion in the period.
The previous low in the ratio was 58.6 percent in the Covid-affected 2020/2021 fiscal year, when development expenditure stood at Sh557 billion and borrowing at Sh950.2 billion.
Before the 2016/17 fiscal year, the Treasury was spending more on development than it was borrowing, painting a healthier fiscal picture of the economy, where some of the taxes paid were being used for job-creating projects.
At the time the Uhuru Kenyatta administration took office in 2013, the ratio of development expenditure (Sh298.9 billion) to net borrowing (Sh232.5 billion) stood at 128.6 percent.
It declined over the next four years to 100.9 percent by 2015/2016, when the government borrowed Sh474.6 billion to fund development spending of Sh479 billion.
The intervening period has seen the ratio drop progressively, partly due to faster growth in borrowing in order to service the government’s ballooning debt pile and a widening wage bill that now stands at Sh624.7 billion compared to Sh274.4 billion in 2013.
Development projects have traditionally been the main casualties of budget cuts whenever successive governments seek to realign expenditure through supplementary budgets to fund 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.
Between 2013 and 2025, Kenya’s recurrent expenditure has grown by 3.6 times from Sh808.3 billion to Sh2.95 trillion, while development spending has increased 1.9 times from Sh299 billion to Sh582.9 billion.
Meanwhile, the country’s total debt load grew from Sh1.85 trillion in June 2013 to Sh11.81 trillion in June 2025, raising the annual interest payments from Sh121.2 billion to Sh995.1 billion over the period.
On the revenue side, total collections, including grants and ministerial appropriations in aid (AiA), fell short of the target by Sh75.9 billion to stand at Sh2.96 trillion in the year to June 2025.
This was despite a year-on-year growth of 8.5 percent compared to the Sh2.724 trillion netted in the 2023/2024 fiscal year.
The Treasury partly attributed the below-target revenue collection to the withdrawal of the Finance Bill 2024 and public protests that disrupted economic activities, although the government reintroduced some of the clauses in the rejected Bill via a Tax Laws (Amendment) Act.
Taxes (ordinary revenue) suffered a shortfall of Sh76 billion, coming in at Sh2.42 trillion versus a target of Sh2.496 trillion.
The biggest driver of the shortfall was income taxes, which fell short of their target of Sh1.125 trillion by Sh32.1 billion, reflecting a tough economic climate for businesses, which were unable to grow profits and hire more workers.
Grants fell Sh13.9 billion below the target of Sh47.2 billion, but appropriations in aid outperformed, with a collection of Sh503.4 billion versus the target of Sh489.4 billion to ease the government’s revenue pain.
