Kenya has decided to cap the fiscal deficit at 4.5% of GDP for the 2025-26 fiscal year, down from 5.1% last year.
Kenya’s Finance Minister is set to present a budget on Thursday, which is expected to help boost revenue to service debt and avoid the need to implement tax measures that caused massive public outrage last year. Nairobi has grappled with a widening fiscal deficit, and President William Ruto has struggled to govern the country under a public debt of 68% of GDP, which is significantly higher than the favourable 55%.
Finance Minister John Mbadi said, “Kenyans cannot bear more tax,” and to that end, the government is trying to find new sources of funding after countrywide protests erupted last year. The country decided to cap the fiscal deficit at 4.5% of GDP for the 2025-26 fiscal year, down from 5.1% last year. Finance experts, however, described this target as overly optimistic. The cabinet has also considered substantially revising its initial budget of 4.3 trillion Kenyan shillings ($33 billion).
Ruto was compelled to abandon his plans to collect roughly $2.7 billion in proposed tax hikes and to reduce this year’s fiscal deficit to 3.5% after mass opposition from the public. The proposed tax measures included increased duties on basic commodities such as bread, vegetable oil and sugar and the introduction of a motor vehicle circulation tax, valued at 2.5% of the value of the car required to be paid annually.
These proposals elicited massive protests, with Kenyans demanding the President’s resignation even after he conceded to public demand and withdrew the bill. The new bill is also not without criticism. Financial analysts believe that the government aims to use the budget to raise indirect taxes.
Thursday’s budget could also have serious ramifications for the privacy of citizens, as there are speculations that the tax authority could be empowered to spy on people’s bank accounts and mobile money transactions. Mbadi offered a thinly veiled defence, citing the need to empower the revenue authorities to collect taxes.
The new budget replaces individual tax hikes with a widened tax base, improved compliance and reduced spending. The government understands that the people are frustrated with the way the taxes are being used in Kenya. However, despite their efforts to restrain expenditure, ultimately not raising taxes is bound to create a significant shortfall in funding.
In an interview with Reuters, Shani Smit-Lengton, Senior Economist at Oxford Economics Africa, said the bill does have enough credible measures to reduce the fiscal deficit; however, the key is efficient implementation, a factor Kenya has historically struggled with. This then leads to revisions via supplementary budgets halfway through the year, resulting in a loss of fiscal credibility.
The success of this budget is important to East Africa’s largest economy, as Kenya is looking to secure a new lending program from the International Monetary Fund (IMF). This new agreement will include funds that were not disbursed under the current program, which both Kenya and the IMF recently discontinued.
Three months ago, both parties decided to nullify the ninth and final review of the current programme, which was anyway set to expire the following month. This caused Kenya’s dollar bonds to sink even lower. In February, Kenya joined an increasing number of African countries which have to borrow cash from the market to pay off maturing debts, to smooth out liabilities and other critical expenditures like health.
Kenya is at a crucial junction this year, as the government must exhibit judiciousness while implementing the budget, in order to convince the IMF of a new program and also balance public sentiment, to avoid another round of protests and unrest. While achieving this balance will prove a challenge to the Kenyan government, it is of utmost importance to retain investor confidence and maintain domestic stability.
