Nairobi — Kenya's economic environment is showing signs of recovery as the country heads into the 2025/2026 fiscal year, but deep structural and fiscal challenges persist, according to insights presented during a pre-budget media briefing by EY experts.
The briefing highlighted improvements in Kenya's macroeconomic indicators throughout 2024, with inflation dropping sharply from a high of 9.6 percent in November 2023 to 2.8 percent by the end of the year.
By December 2024, inflation was recorded at 3 percent, a significant decline from 6.6 percent the previous year.
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The drop was attributed to falling food and fuel prices, with fuel inflation turning negative due to easing global oil prices and the appreciation of the Kenyan shilling.
"The tightening of the policy framework played a major role in stabilizing key macroeconomic variables," read the report in part, adding that the successful issuance of the Eurobond also helped strengthen the exchange rate.
Despite these gains, Kenya continues to face revenue shortfalls and growing fiscal vulnerabilities.
The government's total projected revenue for the 2025/26 fiscal year stands at Sh3.39 trillion against planned expenditures of Sh4.26 trillion, resulting in a fiscal deficit of Sh831 billion, equivalent to 4.3 percent of the GDP.
"This shortfall points to persistent challenges in revenue mobilization, despite stable spending patterns."
Debt vulnerabilities remain a concern, driven by years of increased public borrowing.
While government spending has stayed within targets, sustainability is being questioned, especially as revenue collection fails to meet expectations.
The report also flagged a contraction in money supply and slowing credit growth to the private sector--factors that may hinder business investment and economic momentum.
On the trade front, Kenya recorded a strong export performance, particularly in agricultural commodities.
However, imports surged as well, mainly of intermediate and capital goods, widening the current account deficit and exposing a growing trade imbalance.
Growth in 2024 is expected to slow to 4.6 percent, down from previous highs, but the economy is projected to rebound to 5.3 percent in 2025, buoyed by agricultural recovery and a resilient services sector.
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At the county level, fiscal discipline remains a critical concern.
In FY 2023/24, some counties allocated as much as 47.6 percent of their revenue to wages--far exceeding the 35 percent threshold mandated by fiscal rules.
Additionally, accumulated pending bills as of June 2024 stood at Sh181.98 billion, posing risks to service delivery and long-term financial health.
EY experts also flagged external risks such as climate change and global trade tensions.
Under severe climate scenarios, GDP could decline by up to 4.2 percentage points by the end of the century.
Meanwhile, reciprocal tariffs from the United States, such as a proposed 10 percent duty, could harm Kenyan exports in key sectors like agriculture, textiles, and horticulture.
While Kenya's short-term outlook is cautiously optimistic, EY cautioned that addressing deep-rooted governance issues, boosting revenue collection, and ensuring sustainable public spending will be critical in achieving long-term economic stability and inclusive growth.
