The Kenyan government is poised to borrow extensively from both domestic and foreign markets to address the fiscal deficit projected at Ksh 768.6 billion in 2025, equivalent to 4.3% of the GDP, according to the Cytonn 2025 Markets Outlook.
To bridge this gap, the government anticipates increased concessional financing from institutions such as the International Monetary Fund (IMF) and the World Bank, complemented by commercial loans from lenders like the Trade & Development Bank (TDB) and the African Development Bank.
Revenue Collection Challenges
Despite efforts by the Kenya Revenue Authority (KRA) to enhance tax collection through measures in the Finance Act 2023 and the proposed Tax Laws Amendment Bill 2024, analysts at Cytonn predict subdued revenue growth. The Finance Act revised several taxes upward and expanded the tax base to include the informal sector and digital services, while the Tax Laws Amendment Bill 2024 introduced reforms like:
- Increased tax-exempt limits for non-cash benefits, gratuity, and pension contributions
- Deductions for contributions to the Affordable Housing Levy and other funds
- Exemptions from VAT or excise duty for locally assembled electric vehicles and goods from AfCFTA countries
However, these measures face hurdles as the rising cost of living reduces disposable income, hampering tax performance. By November 2024, total revenue collected stood at Ksh 940.9 billion, representing 35.8% of the revised target of Ksh 2,631.4 billion for FY 2024/2025 and 85.8% of the prorated estimate of Ksh 1,096.4 billion.
Economic Growth Projections
Cytonn maintains a neutral stance on Kenya’s GDP growth, forecasting a range of 5.0% to 5.4% in 2025. This growth is expected to be driven by:
- Continued recovery of business activity.
- Strong growth in the agricultural sector.
- Robust performance in the services sector, particularly in information technology, accommodation, and food services, bolstered by increased tourism.
However, Cytonn warns of potential risks to this growth, including high debt distress and inflationary pressures. As Kenya navigates its fiscal challenges, the balance between financing development and maintaining economic stability remains delicate, making 2025 a critical year for fiscal and economic policy.
