Kenya is setting its sights on trimming its budget deficit to 4.9% of gross domestic product in the 2026/27 fiscal year, a move that reflects the East African nation’s push for fiscal prudence amid lingering debt concerns and economic headwinds.
The target, revealed by a senior finance ministry official on Wednesday, comes as the government grapples with the aftermath of last year’s tax protests and seeks to stabilise finances without derailing growth.
It’s a delicate balancing act for President William Ruto’s administration, which has faced scrutiny over borrowing levels and spending priorities. The announcement from Chris Kiptoo, principal secretary at the National Treasury, during a budget preparation workshop, highlights Nairobi’s determination to rein in deficits that ballooned during the COVID-19 era.With public debt hovering around 67% of GDP, Kenya aims to avoid the pitfalls that have plagued other emerging markets, focusing instead on sustainable borrowing and revenue reforms. Analysts say this could pave the way for lower debt-servicing costs and more room for investments in key sectors like agriculture and infrastructure.
The Path to Fiscal Consolidation
Kenya’s fiscal journey has been bumpy in recent years. Deficits peaked at 8-9% of GDP in the early 2020s, fuelled by pandemic-related spending and ambitious infrastructure projects under the previous administration. By the 2023/24 fiscal year the gap had narrowed to about 5%, but protests in 2024 against proposed tax hikes forced the withdrawal of the Finance Bill, pushing the 2024/25 deficit up to 5.9%.
Looking ahead, projections show a steady decline: 4.7% in 2025/26, followed by the 4.9% target for 2026/27. The medium-term outlook is even more optimistic, with deficits expected to drop to 3.7% by 2027/28 and 3.4% by 2028/29, aligning with benchmarks from international lenders like the IMF and World Bank. This consolidation is crucial, as the debt-to-GDP ratio is forecast to peak at 64% in 2025 before easing, provided reforms stick.
Kiptoo stressed the need for “fiscal sustainability” to fund essential services while managing debt accrued since 2013. The strategy draws lessons from recent unrest, prioritising measures that boost revenue without alienating taxpayers.
Boosting Revenues Without the Backlash
At the heart of the plan is a drive to increase domestic revenues to 17.5% of GDP in 2025/26, dipping slightly to 17.1% the following year. Ordinary revenues are projected to reach 2,998.3 billion shillings ($23.2 billion) in 2026/27, up from current levels, through a mix of policy tweaks and administrative overhauls.
Recent legislation, including the Tax Laws Amendment Act and Business Laws Amendment Act of 2024, aims to simplify tax procedures, widen the base and leverage technology to curb evasion. Non-tax revenues from government services are also set to grow. The Medium-Term Revenue Strategy emphasises predictable and fair taxation to foster business confidence and attract foreign investment – a shift from the heavy-handed approaches that sparked 2024’s protests.
Reining in Spending
On the expenditure side, the government plans to cap total outlays at 4,649.8 billion shillings, or 22.2% of GDP, in 2026/27. Recurrent spending, including salaries, will be limited to 16.4% of GDP, while development expenditures rise to 3.6% to support infrastructure.
Key tools include zero-based budgeting starting in 2026/27, where every expense must be justified from scratch, and the expansion of e-Government procurement to eliminate waste. Public-private partnerships will take on more major projects, pension reforms will tackle long-term liabilities, and clearing over 500 billion shillings in pending bills is expected to inject liquidity into the private sector.
Managing Debt and Seeking Growth
Financing the deficit will rely on a mix of domestic and external borrowing: 775.8 billion shillings from local sources and 241.8 billion from abroad in 2026/27, aiming for a 65-35 split favouring domestic markets. Efforts to deepen the bond market and extend maturities have already eased near-term pressures.
Economic growth is assumed at 5.3% through 2027, bolstered by subsidies in agriculture, tourism revival and the Bottom-Up Economic Transformation Agenda targeting micro, small and medium enterprises, affordable housing and the digital economy. International support, including ongoing IMF programme discussions, is vital for continuity beyond the 2027 elections. The IMF views Kenya’s debt as sustainable if consolidation holds.
However, risks loom large. Climate shocks could disrupt agriculture, while global volatility might hike borrowing costs. Domestically, wage pressures in counties and low budget absorption rates pose threats. The World Bank’s recent decision to pause a $750 million loan, demanding further deficit narrowing, adds urgency to these reforms.
In the end, Kenya’s success hinges on disciplined execution and a bit of external fortune. As Kiptoo put it, it’s all about finding that equilibrium. If achieved, it could unlock inclusive growth; if not, debt vulnerabilities might deepen. For now, Nairobi is betting on resilience and reform to steer the course.
