Kenya experiencing a “lost decade” in public expenditure due to large fiscal deficits, weak export performance, and sluggish investment growth.

The ability of the Kenyan Government to collect more revenue continues to be hampered by its inability to onboard the hard-to-tax sectors leading to a failure to deliver on its fiscal consolidation targets.

The Institute of Public Finance in its latest Macro-Fiscal Analytic Report notes that the collapse of the 2024 Finance Bill has forced the government to adopt a more piecemeal approach to finding alternative measures to widen the tax base. Further shocks that reduce growth or increase borrowing needs could put significant pressure on the limited fiscal buffers that remain.

James Muraguri, CEO of the Institute of Public Finance said, “With revenue generation continuing to face headwinds, aid allocations, particularly in health and infrastructure, have declined, emphasizing the urgency of mobilizing domestic revenue. Additionally, Kenya’s poverty rate remains high for its level of income perpetuated by a dual labour market that generates a small number of well-paying jobs in the formal sector and leaves most in the informal sector on much lower wages.”

Kenya’s enduring debt vulnerability highlights the importance of the government staying on course with fiscal consolidation over the medium term. The country’s current debt difficulties reflect its lack of fiscal buffers to protect itself against any future potential shocks. With further fiscal restraint, borrowing should decline and the need for additional external financing should be minimized, which should hopefully result in the re-building of both fiscal buffers and foreign exchange reserves which to date have not recovered.

“The higher-than-planned borrowing in the 2024/25 fiscal year while it is intended to offset underperforming revenues, it undermines Kenya’s consolidation efforts, as the country has limited scope to continue doing

this without triggering further debt problems. Despite economic recovery and reforms since then, revenues have been slow to return to pre-pandemic levels and have lagged previous projections and targets,” Mr. Muraguri added.

Another area of concern is the reduced government spending on the health sector which has declined by approximately 7% in real per capita terms over the past five years and falls well short of international benchmarks necessary to attain UHC. Notably, donor on-budget financing for health has gone down, accounting for much of the overall decline in government spending. While reforms to the social health insurance system are underway, it remains to be seen if they will be successful in delivering the much-needed universal primary coverage.

The report further noted the mixed picture painted by sectoral analysis, with agriculture

rebounding with a 6.5% growth in 2023, driven by favorable rains, (albeit low government spending in the sector at 3.1% of the national budget), and positive growth in investments in gender-sensitive programs increasing by 32% between 2021/22 and 2023/24. However, burdens persist such as sanitation problems in urban informal settlements, and the triple challenge of malnutrition, with stunted growth and obesity.

The report reiterates the country’s Open Budget Index score of 55%, leveling below the sufficient threshold of 61%, and delays in audit reports and fund disbursements, and inadequate budget information as some key governance challenges. Notably, the Equalization Fund, intended to address historic marginalization, has accrued arrears of Ksh. 49 billion. Nevertheless, the Government, supported by international partners, is implementing a new PFM Reform Strategy aimed at enhancing revenue administration, transparency, and public spending efficiency.

Looking ahead, fiscal consolidation remains a key policy focus as Kenya grapples with debt vulnerabilities and revenue shortfalls. Addressing weaknesses in PFM systems, ensuring consistent county transfers, and broadening the tax base are essential for sustainable growth. The 2025 Macro Fiscal Analytic Snapshot for Kenya underscores the urgency of these reforms while fostering inclusive growth across sectors.