Kenya is grappling with rising debt, falling revenues and tightening fiscal space, the World Bank’s latest Public Finance Review warns.
The report says mounting fiscal pressures are weakening growth and job creation, and calls for five key reforms: stronger governance, improved competitiveness, better management of state-owned enterprise risks, retargeted subsidies, and a renewed approach to urban fiscal policy to restore stability and boost productivity.
The review released on Tuesday notes that Kenya’s public debt has climbed to nearly 68 percent of GDP, while debt servicing now consumes over a third of government revenue, leaving limited room for development spending.
At the same time, the report notes that tax collections have dropped from 16.2 percent of GDP in FY2016/17 to just above 14 percent, even as the labour force expands by about 800,000 people annually.
Financial economists involved in the review say Kenya can restore fiscal balance without sacrificing opportunity.
“Restoring stability does not have to come at the cost of opportunity,” they argue, adding that fiscal policy should be viewed as “an instrument for building a fairer, more resilient economy that creates tangible benefits for all citizens.”
But the shrinking fiscal space has already constrained investments in infrastructure, education and health, areas the report identifies as foundational to job creation and productivity.
Despite significant public investment over the past decade, productivity remained stagnant between 2011 and 2019, and employment continued to grow mainly in low-productivity informal sectors.
The report further highlights that real wages have fallen by more than 13 percent since 2019.
The authors caution that Kenya “cannot maintain the current path of rising debt and fiscal slippage,” and call for a comprehensive and sequenced reform agenda.
Central to this agenda is rebuilding public trust, “Citizens’ willingness to pay taxes depends on seeing revenues used transparently and equitably,” they note.
The report outlines five priority reform areas which include strengthening governance and reducing leakages.
The review states that improved procurement, tackling conflicts of interest and curbing corruption could lower the debt-to-GDP ratio by more than 15 percentage points over time while boosting productivity and wages.
Creating a more competitive private sector, it warns that Kenya’s complex corporate tax system, with uneven incentives and distortions, risks deterring investment.
Simplifying corporate taxation and leveraging opportunities under African Continental Free Trade Area, (AfCFTA) could boost productivity and formal employment.
Reducing fiscal risks from state-owned enterprises (SOEs), the report says, absorb large fiscal resources without consistently delivering value.
It argues that divestiture in competitive sectors and strengthened governance in strategic ones would enhance both fiscal stability and service delivery.
Retargeting subsidies and tax exemptions, the review notes that agricultural subsidies largely benefit wealthier farmers, while numerous tax exemptions reduce revenues without clear developmental value.
Rationalising these, it says, would free resources for targeted social protection and ease liquidity pressures caused by pending bills.
Transforming urban fiscal policy, with Kenya’s cities holding vast untapped economic potential, the report proposes expanding land and property taxation and improving urban infrastructure to unlock innovation and high-productivity employment.
Sequencing will be crucial. In the short term, the report urges Kenya to restore fiscal credibility through tighter procurement controls and phasing out regressive exemptions.
Medium-term priorities include restructuring SOEs, expanding the tax base and containing the wage bill.
Long-term sustainability requires embedding reforms in institutions that can withstand political cycles.
If implemented, the reforms could reduce Kenya’s debt-to-GDP to about 44 percent by 2035, compared to continued escalation under current trends.
This would support faster growth, higher productivity and improved real wages as more workers transition into productive sectors.
The economists conclude that Kenya stands at a pivotal moment, citing the youth-led protests against the 2024 Finance Bill as a demand for accountability and fairness.
“Without reform, Kenya risks deepening its debt and alienating a generation,” they state. “With it, the nation can chart a more inclusive and hopeful path.”
