Treasury CS John Mbadi. Photo/courtesy.
Kenya’s public debt remains at high risk of distress, with interest payments absorbing about a third of tax revenue. Reforms to strengthen fiscal sustainability in an equitable way while promoting inclusive growth and jobs are critical to revive a slowing economy and a weak labor market.
According to the latest World Bank Kenya Economic Update, Special Focus on Poverty and Distributional Impacts of Fiscal Policy in Kenya, some macroeconomic indicators have improved since 2024, including declining inflation, a stabilized exchange rate, and stronger international reserves, but the overall pace of economic growth has slowed.
Kenya’s real GDP is expected to pick up gradually in the medium term, with growth projected to increase from 4.5 percent in 2025 to about 5.0 percent in 2026 to 2027.
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The economic slowdown stemmed from multiple challenges including floods, high interest rates, and subdued business sentiment following protests and reduced development spending.
Despite resilient agriculture, strong remittance inflows, and a rebound in services, growth was further dampened by weak industrial activity, sluggish private consumption, and policy uncertainty that constrained investment and formal employment growth.
Kenya’s current account deficit narrowed to 3.1 percent of GDP in the 12 months to February 2025, supported by a rebound in exports, particularly agricultural goods and reexports, and strong remittance growth of 19 percent.
However, tradable sectors underperformed slightly, with tea and manufactured exports declining as a share of GDP, and services exports weakened due to falling travel receipts.
“Despite improvements in Kenya’s macroeconomic indicators, the country continues to face structural challenges, including insufficient job creation and low wages, especially among the youth,” said Qimiao Fan, the World Bank Division Director for Kenya, Rwanda, Somalia and Uganda.
Revenue collections have been underperforming, and more efficient revenue and expenditure policy are needed, together with faster arrears verification and repayment in line with Kenya’s debt strategy.
Overall, the economic outlook faces several downside risks, including fiscal challenges, weather, and external shocks, but there are potential upside scenarios.
Accelerated economic reforms, including further improvements in public financial management, expenditure efficiency, and governance, could enhance investor confidence and spur economic activity.
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The special focus of this Economic Update, further analyzed in the Public Finance Review (May 2025), shows that while Kenya’s fiscal system reduces inequality, the increased coverage and value of transfers could further offset the burden of taxes on poor and vulnerable households.
“Fiscal policy is more than a budgetary tool it’s a lever for equity. Kenya’s system helps narrow inequality, but it is falling short on poverty. To make it work for the poorest, we must spend smarter, not just more,” said Naomi Mathenge, Senior Country Economist, World Bank Kenya.
Expanding cash transfers could yield significant gains and the report shows that fiscal space for such efforts could be expanded to better invest in more efficient and targeted support for the poor.
In parallel, well-targeted value added tax (VAT) reforms, especially when paired with complementary social protection and pro-growth measures, can significantly enhance Kenya’s fiscal space.
Investment in health and education remains important for long-term gains. When combined with inclusive growth, these reforms can make fiscal policy a powerful engine for reducing poverty and creating more and better jobs.
