NAIROBI, Kenya – Kenya’s economy faces a precarious balance between growth and risk in the coming fiscal year, the Parliamentary Budget Office (PBO) has cautioned.
In its latest Budget Options report for the 2025/26 financial year, the PBO highlights mounting fiscal pressures and urges policymakers to exercise caution while considering spending plans.
The advisory comes as the government grapples with sluggish revenue collection, ballooning debt service costs, and rising expenditure needs in critical sectors such as health and education.
The PBO underscores the need for targeted investments, regulatory reforms, and enhanced fiscal discipline to navigate the economic turbulence ahead.
Economic Outlook: A Delicate Balance
According to the PBO, Kenya’s economic outlook is a mix of opportunities and risks.
The agriculture and services sectors remain the key drivers of growth, showing resilience despite external shocks.
However, several risk factors—including climate change, global economic trends, and domestic fiscal constraints—threaten to derail progress.
The government’s struggle with revenue collection is a major concern.
As of December 31, 2024, total ordinary revenue stood at Ksh.1.1 trillion, just 44.1% of the annual target.
This shortfall, coupled with the rising cost of debt servicing—Ksh.653.5 billion paid in interest alone during FY 2024/25—continues to squeeze public finances.
With the fiscal deficit projected to hit Ksh.759.4 billion in FY 2025/26, the PBO warns that unchecked borrowing and expenditure hikes could deepen Kenya’s financial strain.
The government has repeatedly pledged fiscal consolidation but has instead expanded spending, including restoring over Ksh.300 billion in a recent supplementary budget following public outcry.
PBO’s Proposed Economic Strategies
To navigate these challenges, the PBO has outlined several policy recommendations aimed at stimulating sustainable economic growth while ensuring fiscal prudence.
1. Boosting the Export Sector
The think tank urges the government to prioritize export-driven growth through investments in agriculture, particularly the horticulture industry. Regulatory reforms should enhance market access, while policy realignment should strengthen Kenya’s position in regional and global trade under Economic Partnership Agreements (EPAs).
2. Increasing Disposable Income
The PBO suggests restructuring budget allocations to favor development over recurrent expenditure. By stimulating household purchasing power, the government could create a feedback loop that boosts consumption, investment, and trade.
3. Expanding Public-Private Partnerships (PPPs)
Encouraging private investment in infrastructure, healthcare, education, and energy could enhance efficiency and ease the government’s fiscal burden. The PBO highlights the manufacturing and technology sectors as key areas where PPPs could drive economic expansion.
4. Job Creation and Industrial Growth
The report proposes specific initiatives to strengthen Kenya’s industrial base, including revitalizing the leather industry. This would involve improving livestock health, investing in processing facilities, and allocating funds to complete the Kenya Leather Industrial Park.
5. Strengthening Rural Electrification and Digital Infrastructure
The PBO calls for at least 30% of the rural electrification budget to be ring-fenced for off-grid solutions. Additionally, accelerating internet connectivity and completing 290 Constituency Industrial Development Centers (CIDCs) could unlock new economic opportunities.
6. Tapping into Diaspora Investments
To harness the financial power of Kenyans abroad, the PBO recommends creating targeted investment vehicles and linking local businesses with the diaspora for joint ventures.
7. Education and Healthcare Reforms
The PBO proposes scrapping the National Examination Waiver Policy, redirecting its Ksh.5 billion allocation toward learner-centered programs. It also suggests reallocating 40% of the Sports, Arts, and Social Development Fund to primary healthcare under the Social Health Authority (SHA).
Government’s Budget Plans Under Scrutiny
While the Treasury’s 2025 Budget Policy Statement (BPS) aligns with some of the PBO’s recommendations—particularly in agriculture, MSMEs, housing, and healthcare—it diverges on key issues like manufacturing and debt management.
The total projected budget for FY 2025/26 is Ksh.3.5 trillion, up from Ksh.3.06 trillion the previous year.
However, revenue collection challenges persist, with the Kenya Revenue Authority (KRA) admitting that past targets have been overly ambitious.
Meanwhile, expenditure is set to rise to Ksh.4.3 trillion, pushing the fiscal deficit even higher.
Despite public pressure to cut spending, the government has continued to expand the budget, contradicting its stated commitment to fiscal restraint.
The PBO warns that without bold reforms, Kenya risks deepening its debt burden and stifling long-term economic growth.
