The World Bank has slashed Kenya’s economic growth this year to 4.5pc citing Kenya’s weak revenue collection and high debt repayment costs.
In its latest Kenya Economic Update, the lender cut the country’s gross domestic product forecast by 0.4pc.
“Kenya is at high risk of debt distress and decisive reforms are urgently needed to keep debt sustainable while promoting growth and jobs,” said Qimiao Fan, World Bank Division Director for Kenya, Rwanda, Somalia, and Uganda.
Assesment by the bank indicates that Kenya currently spends about a third of its revenue on debt repayments amid revenue shortfalls.
Data by the Kenya Revenue Authority (KRA) indicates that as at the end of April, revenue collection amounted to 2.11 trillion against a target of Ksh 2.19 trillion.
The authority is now unlikely to raise Ksh 556 billion needed to reach the revenue target of Ksh 2.67 billion by end of the current fiscal year in June.
As at the end of December last year, the country’s public debt amounted to Ksh 10.9 trillion, comprising domestic debt of Ksh 5.8 trillion and external debt of Ksh 5.2 trillion.
According to Treasury actual cumulative external debt service during the period was Ksh. 231.29 billion against the financial year target of Ksh. 590.62 billion.
Debt service to bilateral creditors accounted for 44pc of the total cumulative debt service while commercial and multilateral creditors accounted for 33.4pc and 22.6pc respectively for the period ending December 2024.
The bank is urging the government to focus on raising the efficiency and equity of public spending, ensure public financial management including procurement and public private partnerships, state-owned enterprises (SOE), and eliminate inefficient subsidies.
“Pathways of continued fiscal slippages or severe austerity measures are economically and socially costly,” said Marek Hanusch, World Bank Lead Economist and Program Leader.
He added, “There is another way that is more sustainable based on packages of reforms.”
Treasury is further being advised to reforming the wage bill and allowances while eventually raising spending on social protection, education, and health which are crucial. These measures could could yield savings of about 1.7pc of GDP.
The National Treasury in the Finance Bill 2025 is proposing to cap the fiscal deficit at 4.5pc, from the current 5.1pc.
World Bank now recommends a set of policy reforms that are estimated to bring Kenya’s debt-to-GDP level to about 44pc of GDP by 2035.
Among them, elimination of all Value Added Tax exemptions which could earn the country at least Ksh 505.5 billion equivalent to 3.4pc of GDP
“However, this approach would disproportionately impact the poor, with full compensation costing KSh 167.7 billion. A targeted compensation strategy could reduce this cost to KSh 42.3 billion but would still leave significant net gains of KSh 337.8 billion” says the bank in the May update.
Kenya could also realize savings of upto Ksh 78.4 billion by removing exemptions on items less consumed by the poor such as non-food luxury goods.
Despite fiscal pressures, treasury has projected the economy to grow by 5.3pc this year, supported by agriculture, manufacturing and services sectors.
