The World Bank has issued fresh conditions on narrowing of Kenya’s budget deficit before unlocking a frozen Sh96.9 billion ($750 million) loan, setting the stage for possible tax increases and austerity measures.
The Treasury says Kenya has yet to agree on additional measures to reduce the budget deficit, delaying the disbursement of the loan that was expected before the end of June 2025.
President William Ruto's administration has been struggling to narrow the fiscal deficit and govern under a heavy total debt-to-GDP ratio of around two-thirds, well above the 55 percent level considered a sustainable threshold.
Kenya’s budget deficit is estimated at Sh901 billion for the fiscal period running to June 2026, and the Treasury can cut expenditure or raise revenues to cut the shortfall.
The government is also struggling to seek new sources of funding after last year's countrywide protests forced it to pursue austerity measures and scrap planned tax hikes worth more than Sh346 billion.
The World Bank had earlier asked Kenya to consider additional consumption taxes like excise duty and value-added tax (VAT) for budget support, which could trigger fresh protests if adopted.
The multilateral lender did not specify if it is pushing for an increase in excise duty and VAT on specific goods or it wants the Treasury to increase the range of products that attract the two taxes.
“The key reason why the disbursement is yet to take place is the World Bank team needed to undertake a macro adequacy assessment to ascertain that Kenya’s debt remains sustainable,” Treasury Cabinet Secretary John Mbadi said last week.
“This assessment has been done, and we are in discussions to generate more consensus on potential additional measures to be implemented in the medium term to support further fiscal consolidation.”
Discussions with the World Bank continue at a time when Kenya is also engaged with the International Monetary Fund (IMF) for a new funded programme to tap additional cheap financing.
The World Bank previously froze the disbursement after Kenya failed to pass key legislation preventing conflict of interest within the public service and enhancing social protections for vulnerable Kenyans.
Kenya has since met the demands after Parliament passed a new Conflict of Interest Bill and the Social Protection Bill, both of which are now Acts after President William Ruto assented to the legislation.
Regulations associated with the Acts are currently before the National Assembly.
The government opted against imposing new taxes or increasing existing ones in this year's budget proposals after deadly protests broke out last year against the government's measures to raise revenue.
More than 50 people were killed when the youth-led protests broke out in June last year, forcing President William Ruto to abandon tax hikes.
The Treasury has preferred to widen the tax net and launch a crackdown on tax cheats to grow national income and ease the appetite for borrowing amid mounting public debt.
Spending cuts have proven difficult against sustained expenditure pressures, including a bloated public wage bill that is estimated at Sh1 trillion every year.
The government projects the budget deficit to fall from 5.8 percent in the financial year ended June 2025 to 4.7 percent in the current cycle.
The fiscal deficit is expected to pick up slightly in the 2026/27 cycle to 4.9 percent before falling again to 3.7 percent by June 2028 and settling at 2.9 percent by June 2030.
Mr Mbadi said Kenya would write to the World Bank to approve the Sh96.9 billion ($750 million) development policy operations (DPO) facility after agreeing on the set of reforms to drive down the fiscal deficit.
“We have had successful and fruitful engagements with the World Bank, and I am happy that the bank has a positive view of the progress we have made, although there are issues we wait to work on,” he added.
“Once the consensus is reached, the government will submit a letter of development policy, which is basically a request to the World Bank to approve the disbursement. We are yet to submit that letter because we haven’t come to a consensus, which we hope to do in due course.”
Kenya expects to receive Sh170.5 billion from the World Bank in the current financial year, with a similar amount targeted in the fiscal years to June 2030.
Increased reliance on the World Bank comes as financing from the IMF remains in limbo.
Kenya remains undecided on whether it needs a new funding programme from the IMF despite initiating discussions on a new deal.
Some officials prefer that Kenya remain without a new IMF programme to wean itself off the support of the fund as it eyes upper-middle income status.
“I don’t think we have a meeting of minds internally on why we need it (the IMF programme),” David Ndii, the chairperson of the President's Council of Economic Advisors, said earlier.
“In the long haul, our goal is to transition from a lower-middle-income to an upper-middle-income country. Part of that means being more market-facing than seeking multilateral financing.”
The Treasury has not budgeted for IMF financing, previously noting the need to manage expectations on the outcome of fresh discussions.
“We are being very cautious because before you get into an arrangement with the IMF, you can’t start assuming that you will get funding. But it doesn’t mean that we are terminating our programme with the IMF,” Mr Mbadi said previously.
The World Bank and the IMF are Kenya’s key sources of cheap financing outside of bilateral support.
The country has increased its borrowing from the pair in recent years as it seeks to avoid relatively costly credit from alternatives such as Eurobonds and syndicated loans.
This has enhanced the influence of the multilateral lenders on Kenya’s policy.
The World Bank is the bigger lender of the two, with outstanding loans of Sh1.66 trillion as at the end of September 2025.
Borrowings from the IMF meanwhile stand at Sh477.2 billion.
The government is seeking to diversify its sources of cheap financing, eyeing sustainability-linked bonds (SLBs) and debt for development swaps.
The World Bank is expected to support Kenya in issuing its first SLB in March next year, which has been estimated at Sh65 billion.
