Jun 29, 2025
On 12 June 2025, the National Treasury presented Kenya’s FY’2025/2026 National Budget to the National Assembly highlighting that the total budget estimates for FY’2024/25 increased by 7.1% to Kshs 4.3 tn from the Kshs 4.0 tn in FY’2024/2025 while the total revenue inclusive of grants increased by 8.0% to Kshs 3.4 tn from the Kshs 3.1 tn in FY’2024/2025. The increase is mainly due to an 6.7% increase in ordinary revenue to Kshs 2.8 tn for FY’2025/2026, from the Kshs 2.6 tn in FY’2024/25.
The FY’2024/2025 budget focuses mainly on providing solutions to the heightened concerns on the high cost of living, the measures put in place to stimulate sustainable economic recovery as well as undertaking a growth-friendly fiscal consolidation to preserve the country’s debt sustainability. Notably, the government projects to narrow the fiscal deficit to 4.8% of GDP in FY’2025/26, from the estimate of 5.1% of GDP in FY’2024/25. As such, this week, we shall discuss the recently released budget and the Finance Bill 2025 with a key focus on Kenya’s fiscal components. We shall do this in four sections, namely:
Section I: FY’2024/2025 Budget Outturn as at May 2025
The National Treasury gazetted the revenue and net expenditures for the eleventh month of FY’2024/2025, ending 30th May 2025. Below is a summary of the performance:
FY'2024/2025 Budget Outturn - As at 30th May 2025 |
|||||||
Amounts in Kshs Billions unless stated otherwise |
|||||||
Item |
12-months Original Estimates |
Revised Estimates I |
Revised Estimates II |
Actual Receipts/Release |
Percentage Achieved of the Revised Estimates II |
Prorated |
% achieved of the Prorated |
Opening Balance |
|
|
|
1.2 |
|
|
|
Tax Revenue |
2,745.2 |
2,475.1 |
2,400.7 |
2,011.4 |
83.8% |
2,200.7 |
91.4% |
Non-Tax Revenue |
172.0 |
156.4 |
180.2 |
145.2 |
80.6% |
165.2 |
87.9% |
Total Revenue |
2,917.2 |
2,631.4 |
2,580.9 |
2,157.8 |
83.6% |
2,365.8 |
91.2% |
External Loans & Grants |
571.2 |
593.5 |
718.4 |
426.1 |
59.3% |
658.5 |
64.7% |
Domestic Borrowings |
828.4 |
978.3 |
1,167.0 |
932.9 |
79.9% |
1,069.8 |
87.2% |
Other Domestic Financing |
4.7 |
4.7 |
8.5 |
4.4 |
52.1% |
7.8 |
56.9% |
Total Financing |
1,404.3 |
1,576.5 |
1,894.0 |
1,363.4 |
72.0% |
1,736.1 |
78.5% |
Recurrent Exchequer issues |
1,348.4 |
1,307.9 |
1,412.7 |
1,263.1 |
89.4% |
1,294.9 |
97.5% |
CFS Exchequer Issues |
2,114.1 |
2,137.8 |
2,289.0 |
1,637.0 |
71.5% |
2,098.3 |
78.0% |
Development Expenditure & Net Lending |
458.9 |
351.3 |
354.9 |
264.8 |
74.6% |
325.4 |
81.4% |
County Governments + Contingencies |
400.1 |
410.8 |
418.3 |
354.3 |
84.7% |
383.4 |
92.4% |
Total Expenditure |
4,321.5 |
4,207.9 |
4,474.9 |
3,519.2 |
78.6% |
4,102.0 |
85.8% |
Fiscal Deficit excluding Grants |
1,404.3 |
1,576.5 |
1,894.0 |
1,361.4 |
71.9% |
1,736.1 |
78.4% |
Total Borrowing |
1,399.6 |
1,571.8 |
1,885.4 |
1,359.0 |
72.1% |
1,728.3 |
78.6% |
Public Debt |
1,910.5 |
1,910.5 |
2,042.1 |
1,448.1 |
70.9% |
1,871.9 |
77.4% |
Source: National Treasury
The Key take-outs from the release include;
The government missed its prorated revenue targets for the eleventh consecutive month in FY’2024/2025, however registering a significant performance improvement, achieving 91.2% of the prorated revenue targets in May 2025. The shortfall is largely due to the challenging business environment experienced in previous months with the Purchasing Managers’ Index (PMI), averaging 49.2, below the 50.0 neutral mark, in the first half of the FY’2024/2025, exacerbated by high taxes and an elevated cost of living. However, the cost of credit has seemingly declined, providing some relief to businesses and households. The improved business environment is reflected in the Purchasing Managers’ Index (PMI), which has averaged at 50.9 in the second half of FY’2024/25 so far. The PMI however dipped to 49.6 in May 2025 from 52.0 in April 2025, signaling a contraction in private‑sector output after seven months of expansion. While efforts to enhance revenue collection, such as broadening the tax base, curbing tax evasion, and suspending tax relief payments, are yet to yield full benefits, future revenue performance will depend on how quickly private sector activity gains momentum. This is expected to be supported by a stable Shilling, lower borrowing costs, and continued efforts to enhance economic growth. The reduction in the Central Bank Rate (CBR) by 25 basis points to 9.75% from 10.00%, following the Monetary Policy Committee’s (MPC) meeting on June 10th, 2025, is expected to further ease credit conditions and support private sector expansion.
Section II: Comparison between FY’2024/2025 and FY’2025/2026 Budgets estimates
The Kenyan Government budget has been growing over the years on the back of increasing recurrent and development expenditures. The chart below shows the evolution of the government budget over a fifteen-year period:
Source: National Treasury of Kenya
For the FY’2025/2026, the budget is projected to increase by 7.1% to Kshs 4.3 tn, from Kshs 4.0 tn in FY’2024/2025. The expenditure will be funded by revenue collections of Kshs 3.4 tn and borrowings amounting to Kshs 923.2 bn.
The table below summarizes the key buckets and the projected changes:
Cytonn Report: Comparison between FY’2024/2025 and FY’2025/2026 Budgets Estimates |
|||
Item |
FY'2024/25 Supplementary Budget II |
FY'2025/26 Estimates |
Change y/y (%) |
Amounts in Kshs billions unless stated otherwise |
|||
Ordinary Revenue |
2,580.9 |
2,754.7 |
6.7% |
Ministerial Appropriation-in-Aid |
486.8 |
567.0 |
16.5% |
Total grants |
52.6 |
46.9 |
(10.8%) |
Total Revenue & Grants |
3,120.3 |
3,368.6 |
8.0% |
Recurrent expenditure |
1,705.7 |
1,805.0 |
5.8% |
Recurrent Consolidated Funds Services (CFS) |
1,242.7 |
1,337.3 |
7.6% |
Development expenditure |
624.7 |
693.2 |
13.0% |
County Transfer & Contingencies |
445.6 |
474.9 |
6.6% |
Total expenditure |
4,007.5 |
4,291.9 |
7.1% |
Fiscal deficit inclusive of grants |
(887.2) |
(923.3) |
4.1% |
Projected Deficit as % of GDP |
(5.1%) |
(4.8%) |
(0.3%) pts |
Net foreign borrowing |
281.5 |
287.7 |
2.2% |
Net domestic borrowing |
605.7 |
635.5 |
4.9% |
Total borrowing |
887.2 |
923.2 |
4.1% |
Source: National Treasury of Kenya, www.parliament.go.ke
Some of the key take-outs include;
Section III: Analysis and House-view on Key Aspects of the FY’2025/2026 Budget
Revenue is projected to increase by 8.0% to Kshs 3.4 tn in FY’2024/25, from Kshs 3.1 tn in the FY’2024/25 supplementary budget II. The increased revenue projections in the FY’2025/26 are mainly attributable to the projected 6.7% growth in ordinary revenue to Kshs 2.8 tn in FY’2025/26, from Kshs 2.6 tn in the FY’2024/25 budget. The main sources of revenue will be:
The chart below compares ordinary revenue projections for FY’2025/26 and FY’2024/25:
The government relies on the effectiveness of the Kenya Revenue Authority in collecting taxes as well as increase in some of the existing taxes to meet its revenue target, which has seemingly resulted in improved revenue collection as evidenced by 93.2% of the revenue targets in FY’2023/24, and having attained 91.2% of the prorated revenue numbers for FY’2024/25 as of end May 2025. To enhance domestic revenue mobilization and support key government programs in FY’2025/2026, the Kenyan government is implementing a blend of tax policy and administrative measures focused on expanding the tax base, improving compliance, and leveraging technology. Priority sectors such as the digital economy, agribusiness, and SMEs are being targeted through tax education and outreach, while the Kenya Revenue Authority (KRA) has introduced digital tools like auto-populated VAT and simplified PAYE returns, the Electronic Rental Income Tax System, and integration of fuel dispensers with the Tax Invoice Management System to streamline compliance and increase transparency. These innovations aim to promote a fair and inclusive tax culture while reducing administrative burdens. However, despite the efforts in place, historically, the government has struggled to meet its target revenue collections resulting to an ever-present fiscal deficit. As such, there are still concerns about the government's ability to meet its revenue collection targets in FY’2025/2026 mainly on the back of the current operating environment, where the cost of living remains elevated despite an ease in inflationary pressures. The chart below shows the ordinary revenue performance in the previous fiscal years:
Source: National Treasury of Kenya and Kenya Revenue Authority
*Total Revenue collection as of 31 May 2025
Expenditure is expected to increase by 7.1% to Kshs 4.3 tn, from Kshs 4.0 tn in the FY’2024/25 budget with recurrent expenditure taking up 73.0% of the total expenditure for FY’2025/2026, in comparison to the 73.6% in FY’2024/2025. The chart below shows the comparison between the recurrent expenditure allocations and development expenditure allocations over the past five fiscal years:
Source: National Treasury of Kenya
*Recurrent Expenditure includes the Consolidated Fund Services (CFS) Expenditure
Some of the key take-outs include;
Amounts in Kshs billions unless stated otherwise |
|||||||
Cytonn Report: Kenya Budget Highest Expenditure Allocations |
|||||||
Item |
FY'2021/2022 |
FY'2022/2023 |
FY'2023/2024 |
FY'2024/2025 |
FY'2025/2026 |
Change |
CAGR |
Interest Payments, Pensions & Net Lending |
718.3 |
867.8 |
1057.7 |
1242.7 |
1337.0 |
7.6% |
13.2% |
Education |
503.9 |
544.4 |
628.6 |
656.6 |
702.7 |
7.0% |
6.9% |
Infrastructure |
383.3 |
416.4 |
468.2 |
477.2 |
535.6 |
12.2% |
6.9% |
County Shareable Revenue |
370.0 |
399.6 |
423.9 |
445.6 |
474.9 |
6.6% |
5.1% |
Public Admin & Int. Relations |
299.7 |
342.2 |
327.0 |
322.4 |
335.4 |
4.0% |
2.3% |
Total |
2275.2 |
2570.4 |
2905.4 |
3069.7 |
3271.8 |
6.6% |
7.5% |
Source: The Mwananchi Guide for the FY’2025/26, National Treasury of Kenya
Notably, the allocation to interest payment, pension and net lending increased by 7.6% to Kshs 1,337.0 bn in FY’2025/26 from Kshs 1,242.7 bn in FY’2024/25, partly attributable to high cost of servicing debt.
The total borrowing for the FY’2024/25 is set to increase by 4.1% to Kshs 923,2 bn, from Kshs 887.2 bn, in FY’2024/25 budget estimates II. The public debt mix is projected to comprise of 31.2% foreign debt and 68.8% domestic debt, from 31.7% foreign financing and 68.3% domestic financing as per the FY’2024/25 Supplementary Budget II. The rise in debt servicing expenses can be partly attributed to the government’s high affinity for debt to finance the wide budget deficits, partly fueled by the ballooning recurrent expenditure and debt costs. As the government works towards maintaining sustainable debt levels, it will be crucial to implement debt management reforms, prioritize concessional borrowing, and develop the domestic debt market to lower borrowing costs further. Additionally, the government will explore innovative financing options such as debt swaps, diaspora bonds, and sustainability-linked instruments to diversify funding sources, and support fiscal consolidation. The chart below shows the evolution of public borrowing to fill the fiscal deficit gap over the last five years:
The key take-outs from the chart include:
We therefore note the persistent fiscal deficit is mainly on the back of low revenue collection and high expenditure. As such, the government needs to minimize spending through the implementation of structural reforms and the reduction of amounts extended to recurrent expenditure. This would allow the government to refinance other critical sectors, such as agriculture, resulting in increased revenue.
Section IV: Finance Bill 2025
On 19th June 2025, the Kenyan Parliament approved the Finance Bill 2025. Rather than introducing aggressive tax hikes, the Bill focused on plugging revenue leakages, a more reserved approach following the widespread anti-finance bill protests that occurred in June and July 2024, following the Finance Bill 2024.The raft of tax changes in the Finance Bill 2025 are geared towards expanding the tax base and increasing revenues through sealing revenue leakages to meet the government’s budget for the fiscal year 2025/2026 of Kshs 4.3 tn, as well as reduce the budget deficit and borrowing.
Against this backdrop of fiscal consolidation and cautious borrowing, the Finance Bill 2025 introduces a series of targeted measures that aim to broaden the tax base, seal revenue leakages, and support the government’s drive toward a more sustainable fiscal framework. Below we highlight some of the key tax changes, effective from 1st July 2025 contained in the Finance Bill 2025 and the implications:
The Finance Bill 2025 reflects a cautious approach, with the government opting for tax administration reforms over new tax burdens. This move is clearly informed by the lessons of 2024, where unpopular tax hikes triggered widespread protests and public discontent. By focusing on broadening the tax base, improving compliance, and sealing revenue leakages, the government seeks to achieve its fiscal objectives while maintaining economic and social stability. The updated budget estimates for FY’2025/26 underscore this approach, with a reduced projected fiscal deficit target of 4.8% of GDP, down from the 5.1% in FY’2024/25. Notably, inflation has remained relatively stable, remaining within the CBK’s target range of 2.5%-7.5%, although the risk of inflationary pressures still remains majorly as a result of the easing monetary policy. Additionally, and the Kenyan shilling has stabilized against major currencies, supporting the overall economic performance. Lending rates have started to ease following the continued easing of the monetary policy stance, with the weighted average lending rate for commercial banks standing at 15.7% as of April 2025, 0.1% points down from 15.8% in March 2025, as such this will create a more favorable environment for credit growth to the private sector, which had previously been constrained by high borrowing costs. With GDP growth expected to rebound from 4.7% in 2024 to an estimated 5.3% in 2025, the stage is set for renewed economic momentum, provided the right mix of fiscal discipline and policy support is maintained and stimulation of the business environment to encourage investment. As Kenya navigates the challenges of high public debt, constrained fiscal space, and growing public expectations, the success of this budget cycle will depend on transparency, accountability, and effective implementation. The Finance Bill 2025 marks a step in the right direction, but sustained commitment will be essential to realize its promise.
Section V: Conclusion and Our View
The Kenyan economy has continued to remain resilient despite recording a slowdown in growth to 4.7% in FY’2024 compared to a growth of 5.7% recorded in FY’2023. We expect the economy to gain momentum and grow at a faster pace given the improved business environment as result of the declining cost of credit providing some relief to businesses and households. Additionally, the Central Bank of Kenya’s Monetary Policy Committee’s (MPC) decision on 10th June 2025 to lower the Central Bank Rate (CBR) to 9.75% from 10.00% in April 2025 in a bid to lower the cost of credit and promote economic growth. The lower CBR is set to reduce the cost of credit issued by lenders, hence encouraging borrowing, which will in turn lead to increased investment spending in the economy by both individuals and businesses. Moreover, the economy is expected to record a growth rate of 5.3% in 2025, mainly supported by private sector growth, continued strong growth of the financial services sector, and recoveries in the agricultural sector. Furthermore, in the FY’2025/2026 budget, the government has allocated Kshs 8.0 bn for the fertilizer subsidy program aimed at lowering the cost of farm input and enhancing food supply in the country.
The government has increased its appetite for debt, projecting to borrow Kshs 923.2 bn in total debt in the FY’2025/26, a 4.1% increase from 887.2 billion in the FY’2024/25. The move is expected to increase the cost of debt servicing, given that both foreign and domestic debt has been ballooning as a result of wide budget deficits. Additionally, with the government's continued inclination towards domestic borrowing, by projecting to increase its domestic borrowing by 4.9% to Kshs 635.5 bn in FY’2025/26, from Kshs 605.7 bn in FY’2024/25, remains a risk to lending to the private sector, with increased credit demand by the government in the absence of alternative borrowing. Notably, the government has also turned to private placements as seen in the recent issue of USD 500.0 mn amortizing note maturing in 2032 on April 2025, which is part of the USD 1.5 billion private bond placements signed in February 2025, showing its efforts to raise funds amid constrained access to external financing.
Overall, we are of the view that the main driver of the growing public debt is the fiscal deficit occasioned by lower revenues as compared to expenditures. As a result, implementing robust fiscal consolidation would help the government bridge the deficit gap. This can be achieved by minimizing spending through the implementation of structural reforms and the reduction of amounts extended to recurrent expenditure. Fiscal consolidation would also allow the government to refinance other critical sectors, such as agriculture, resulting in increased revenue. However, the overall risk to the economy remains high, owing to the high debt servicing costs in the next fiscal year.
Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.