The cost of Kenya’s perennial budget deficits

Year after year, the gap between what the government earns and what it spends widens, plugged not by growth-driven revenue but by ever-mounting borrowing. 

Understanding why this pattern persists, and what it means for the economy is a lesson to learn on Kenyan public finance today.

A Deficit That Never Goes Away

With ordinary revenues trailing government spending by big margins, huge fiscal deficits are now a key feature of Kenya's budgets, financed through a combination of domestic and external borrowing.

The numbers tell a sobering story. 

Records from the Kenya National Treasury indicate that budget execution in FY 2023/24 closed with a fiscal deficit of Ksh.835.1 billion, equivalent to 5.1 per cent of GDP, against a target of Ksh.925.1 billion (5.7 per cent of GDP), despite significant challenges in revenue mobilization and difficulties in raising resources from the domestic market. 

For FY 2024/25, Kenya's fiscal balance showed a gradual improvement path, narrowing from a deficit of 8.3 per cent of GDP in FY 2020/21. 

On paper, Kenya has never managed to record a surplus. Historically, the government has struggled to meet its revenue collection targets, resulting in an ever-present fiscal deficit. This situation has seen the 

Since the Uhuru Administration, the cumulative effect of having budget deficits has been a dramatic explosion in public debt. 

The country's public debt has surged to over Ksh.12 trillion in the past three years of the Kenya Kwanza administration, with public debt growing by Ksh.1.04 trillion between January and August 2025 alone. 

For context, President Mwai Kibaki inherited a debt of Ksh.633 billion in 2003 and left behind a debt of Ksh.1.79 trillion. This figure has since multiplied over twelve times since 2013. 

Chronic Revenue Shortfalls

The single most consistent cause of Kenya's budget deficit is its persistent failure to collect as much revenue as it projects. 

The Kenya Revenue Authority (KRA) regularly falls short of its targets, undermining even the most optimistic budget plans. Humphrey Wattanga, the former Commissioner General of KRA, was shown the door last week for what the Chairman of the board, Nderitu Muriithi, said was the board’s dissatisfaction with persistent criticism over missed revenue targets.

The government relies on the effectiveness of the KRA in collecting taxes as well as increases in existing levies to meet its revenue targets. 

However, this is a two-pronged matter, and it cannot simply boil down to KRA’s missed collections target alone. 

As important as the missed revenue targets is the fundamental starting point of the National Treasury projections on revenue targets and amounts that could realistically be drawn from various efforts and sectors. 

A particular case that could be excused is the FY 2024/25 budget refusal riots by Gen-Z when matters were compounded by the withdrawal of the Finance Bill 2024, which sought to raise an additional Ksh.302.0 billion. 

On the other hand, the June 2024 anti-government protests that forced the withdrawal of the Finance Bill were a watershed moment because they demonstrated that Kenya’s political space for aggressive tax measures is definitely constrained. 

Locally, due to an unpredictable business environment, combined with high costs of input and other charges on the same, a narrow economic outlook due to external shocks, coupled with runaway corruption and limited liquidity in the country, revenue collections still fail to meet the target. 

The gap between what the National Treasury plans to raise and what it actually collects is a behavioral-cum-structural issue and not a chance issue.

A Bloated Public Wage Bill

Perhaps the most insidious driver of Kenya's fiscal imbalance is the relentless growth of the public sector wage bill. 

Paying government employees consumes a disproportionate share of public revenues, crowding out spending on services and development. 

Today, a staggering 68 per cent of all ordinary government revenue is immediately consumed by just two things: servicing the country's massive public debt and paying the ballooning government wage bill. In just four years, interest on public debt has jumped from 18 per cent to 25 per cent of total government spending. 

The International Monetary Fund (IMF) has raised concerns that Kenya is among countries that exhibit large increases in the wage bill, particularly in the run-up to elections, and that, given Kenya's rising debt levels, the decision to increase spending on public sector wages is a concern, as fewer funds are left over for economically productive development expenditure. 

High Infrastructure Spending and Debt-Financed Projects

Since the Jubilee administration, Kenya has embarked on an ambitious infrastructure investment program, the Standard Gauge Railway (SGR). 

Alongside this, there were highways, dams, and digital infrastructure mega projects largely financed through external borrowing. 

While some of these projects delivered genuine gains, like in ICT, the scale and terms of borrowing were poorly matched to Kenya's debt-carrying capacity, and corruption played its part to deny the country value for money in most of these projects. 

Increased reliance on commercial external debt with short tenors also puts pressure on the government to refinance at short intervals and on worsening terms. 

Public Recurrent Expenditure Crowding Out Development

The Kenya Public Finance Management Act, 2012 stipulates that the government may only borrow for development purposes, not to fund recurrent expenditure. In practice, this provision has been widely disregarded. 

Contrary to this legal requirement, much of Kenya's borrowing has been channeled to recurrent spending at the expense of critical sectors like infrastructure, healthcare, education, and agriculture. 

Unrestrained expenditure, coupled with misappropriation and embezzlement of public funds, has fueled the swelling debt. 

Recurrent expenditure takes up approximately seventy-three percent of the total expenditure in the FY 2025/26 budget, leaving only a fraction for the capital investment that could generate future growth and revenue.

Beyond structural problems, Kenya has been buffeted by a series of external shocks that have repeatedly thrown fiscal plans off course. 

The government, in times gone by, blamed unanticipated economic shocks such as drought and COVID-19 for worsening the debt situation, and these disruptions have repeatedly required emergency spending that widens the deficit further, often in years when revenues are already under stress.

Corruption and Mismanagement of Public Funds

No analysis of Kenya's fiscal deficits would be complete without acknowledging the role of corruption and mismanagement. 

Allegations of corruption and financial mismanagement are huge factors at both the national and county levels, and critics point out that the growth in infrastructure and welfare spending does not match the growth in debt since 2013, with no proper records of debt spending in many instances. 

Borrowed funds intended for capital projects are frequently diverted to recurrent requirements, putting a damper on national investment in viable projects and posing a significant threat to the economy's growth. 

Debt Distress and Loss of Creditworthiness

Kenya's debt rating as of April 2026, reflects a stabilized outlook following recent upgrades, with Moody's at B3 stable and Fitch at B- stable. 

These ratings are supported by improved foreign exchange reserves ($12.2B+) and proactive external debt management, though high debt-to-GDP levels (approx. 67.8%) and elevated interest payments keep the risk of distress elevated. 

Kenya is borrowing beyond its means, with real consequences for the cost and availability of future financing.

As debt accumulates, an ever-larger share of government revenue is consumed just to service it and thereby creating a vicious cycle in which borrowing to pay debts forces more borrowing. 

During the 2024/25 fiscal year, the Government effected Ksh.1.72 trillion in debt service payments, comprising Ksh.1.14 trillion to domestic lenders and Ksh. 579 billion to external creditors. 

Treasury Cabinet Secretary, John Mbadi noted that to mitigate prevailing debt vulnerabilities, the National Treasury embarked on a suite of liability management operations, encompassing the refinancing of high-cost obligations, extension of debt maturities, and increased uptake of concessional financing to improve debt sustainability metrics. 

However, all these are yet to be felt as basic services delivery suffer a crowding-out effect. 

Support for older persons has shrunk, families report hospitals without medicine, and at the county level, real health spending has dropped despite a rapidly growing population, while pending bills have exploded. 

Crowding Out Private Investment

When the government borrows heavily from domestic markets to finance its deficit, it competes directly with private businesses for the available limited credit. The government has also advocated for a reduction in public spending. 

This has largely been ignored but in sectors like where fiscal consolidation is already taking place like in education, healthcare, and infrastructure, supplementary budgets were raised to counter concerns about service delivery and debt management. 

Exchange Rate Vulnerability and Reduced Fiscal Space

Heavy reliance on external debt exposes Kenya to severe currency risk. If the Kenyan shilling depreciates against the currency in which borrowing is denominated, the cost of servicing this debt in local currency terms increases significantly. 

But earlier this month, Kenya announced it had significantly reduced its dollar-denominated external debt, reaching the lowest level on record, as the government accelerates a strategic shift towards the Chinese yuan to shield against exchange rate volatility. 

The fundamental danger of persistent deficits is the gradual hollowing out of the government's ability to invest in the drivers of long-term prosperity. 

According to the government itself, Kenya faces three major challenges simultaneously: rising demand for increased public expenditure, a declining debt-carrying capacity, and serious limitations in mobilizing higher tax revenues. 

This trilemma, needing to spend more while being able to borrow less and tax less, is the real defining fiscal predicament of our time.

When a government spends the bulk of its revenue on wages and debt service, there is little left for roads, schools, hospitals, or agricultural support. 

The very investments that would raise productivity, expand the tax base, and ultimately reduce the deficit over time, are unattended. 

Unrestrained expenditure and misappropriation of public funds have rendered the vision of double-digit economic growth a distant dream while financial turmoil continues to ravage the nation. If the causes of Kenya's deficits are troubling, the consequences of allowing them to persist and grow are potentially catastrophic for the economy's long-term stability and the welfare of ordinary Kenyans.

Kenya's budget deficits are not the product of one bad year or a single misguided policy. They are the accumulated result of structural weaknesses, a narrow tax base, an oversized wage bill, debt-financed spending that has outpaced the economy's capacity to repay. 

Corruption and a political culture of impunity run the show as repeatedly prioritized short-term expenditure is preferred over long-term fiscal discipline.

What’s the way out? 

The path forward is not easy, but it is comprehensible: broadening the tax base without burdening the poor, rationalizing the public wage bill, redirecting borrowing strictly toward productive capital investments, tackling corruption, and building the institutional capacity to manage public finances with transparency and accountability. 

The stakes could not be higher. As the debt-service burden consumes an ever-larger share of ordinary revenue, Kenya risks entering a debt spiral from which escape becomes progressively harder and more painful.

Kenya is not yet at the precipice, but it is walking toward it with its eyes wide-open. The choices made in the next few budget cycles will determine whether the country can engineer a genuine fiscal turnaround, or whether a future generation of Kenyans will be left in misery to service the consequences of today's government recklessness.