Kenya’s path to fiscal stability in 2025

Gerald Kibira arranges buckets of potatoes at a grocery stand in Kiawara trading centre, Nyeri, ahead of market day on December 23, 2024.

Photo credit: Joseph Kanyi | Nation Media Group

A grim picture of our country's financial situation is painted by recent data from the Central Bank of Kenya (CBK). Our cumulative revenue growth for the first five months of the 2024/25 financial year is a meagre 1.1 percent.

This weak growth and the Treasury report from November, which showed domestic borrowing at Sh359 billion (43 percent of the target), indicate that we are in a risky cycle of borrowing to cover necessities.

This new year, the figures require our immediate attention: tax collection is showing a concerning 1.4 percent year-over-year fall, while debt servicing currently consumes an astounding 84 percent of our tax revenue.

Let's be clear about the implications of these numbers for average Kenyans.

These figures indicate only Sh16 remains to finance development initiatives, basic government operations, and critical services after Sh84 of every 100 received is used to pay off service debt. We must first recognise that 2025 cannot be a normal year.

There is no space for complacency given the Treasury report's predicted yearly debt servicing of Sh1.9 trillion compared to expected tax collections of Sh2.5 trillion.

Immediate action on several fronts is the answer. In order to reduce loopholes and broaden the revenue base, our tax administration system requires complete digitalisation, not just computerisation. According to the CBK analysis, the recent drop in VAT receipts indicates serious leakage that needs to be fixed.

We also need to reconsider how we spend money on development. According to Treasury data, the current accomplishment rate for development expenditures is 23 percent, which indicates inadequate project prioritisation and implementation.

It is now necessary to invest every development penny where the greatest economic returns may be obtained. We continue to be overly dependent on local loan markets, according to the CBK's November data on domestic borrowing.

This raises interest rates and discourages investment from the private sector. Aggressive revenue mobilisation and minimization of expenditures would be part of a more sustainable strategy.

Treasury policymakers need to focus on budgetary reform and consolidation this year. Although ambitious, the Treasury's medium-term goal of increasing the tax-to-GDP ratio to 20 percent is essential. But conventional methods by themselves are insufficient to do this. We want creative answers that take into account the reality of our digital economy and changing business landscape.

CBK and Treasury data makes it quite evident that we are running out of time and fiscal flexibility. Our ability to escape this debt trap or further deteriorate our financial situation will depend on the decisions we make in 2025.

In addition to showing us the way forward, if we have the courage to follow it, the numbers don't lie.

The writer is a development economist and public policy specialist

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