NAIROBI, May 27, 2025-Kenya's fiscal policy could be better used to create more and better jobs, strengthen the social contract with Kenyan citizens, provide better public services, and spur inclusive economic growth. Strengthening governance is paramount to reduce fiscal leakage which undermines public trust, while structural reforms are needed to promote productivity and growth in an environment of fiscal consolidation.
The latest Kenya Public Finance Review (PFR) - Beyond the Budget: Fiscal Policy for Growth and Jobs recommends a set of policy reforms that are estimated to bring Kenya's debt-to-GDP level to about 44 percent of GDP by 2035, close to the mid-2010 figure. The report notes that Kenya's fiscal performance is strongly associated with its changing economic structure during the last 15 years, in addition to governance and socio-political challenges. A fiscal consolidation strategy should reflect this context, looking at the budget and beyond.
The report comes at a time when Kenya faces a precarious fiscal situation. High public debt, ballooning interest payments, and economic slowdown necessitate urgent fiscal consolidation. However, austerity measures alone are insufficient and lack social support.
"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.
The report emphasizes that revenue policy could concentrate on broadening the tax base while improving efficiency and equity. This would involve rationalizing tax exemptions, encouraging formalization, reforming property taxes, and strengthening tax compliance. These changes could yield additional revenue of about 4 percent GDP.
Expenditure policy could further focus on raising the efficiency and equity of public spending, focused on public financial management, including procurement and public private partnerships, state-owned enterprises (SOE), and inefficient subsidies. Additionally, reforming the wage bill and allowances while eventually raising spending on social protection, education, and health, are also crucial. The proposed expenditure measures could yield savings of about 1.7 percent of GDP.
However, additional resources are needed to expand public service delivery: Social protection requires at least an additional 0.3 percent of GDP per year, health another 3 percent, and education at least an additional 1 percent. These proposed measures would strengthen service delivery through efficiency gains while generating the required revenue.
Beyond public financial management, some of the governance reforms discussed in the report include improving the conflict-of-interest framework, tightening controls of money laundering, improved licensing regimes and digitized instant traffic fines.
Some structural reforms recommended include the implementation of the Africa Continental Free Trade Agreement (AfCFTA), competition policies alongside SOE divestiture, and interventions for urban competitiveness and the reduction of the cost of living.
"Pathways of continued fiscal slippages or severe austerity measures are economically and socially costly," said Marek Hanusch, World Bank Lead Economist and Program Leader. "There is another way that is more sustainable based on packages of reforms."
The World Bank PFR is a comprehensive assessment of a country's public finances, focusing on fiscal policy, revenue mobilization, and public expenditure management. It analyzes how well a country is using its public resources to achieve development goals and provides recommendations for improvements. The review examines the government's overall fiscal strategy, including revenue generation, spending patterns, and debt management.
