GDP to grow by 5.3pc this year, say Parliament think tank

Treasury Cabinet Secretary John Mbadi during the launch of the Kenya Economic Report 2025 in Nairobi, on December 16, 2025. [Wilberforce Okwiri, Standard]

The country's Gross Domestic Product (GDP) is projected to grow by 5.3 per cent in this financial year.

According to the Parliamentary Budget Office (PBO), this is supported by anticipated favourable weather, recovery in key service sectors and ongoing implementation of the Bottom-Up Economic Transformation Agenda (BETA).

Inflation is expected to remain within the 2.5 – 7.5 per cent band, while a more accommodative monetary stance is expected to gradually lower interest rates and reinforce private sector credit growth.

“The outlook also assumes a stable exchange rate, reflecting improved foreign exchange inflows and decreased refinancing risk following issuance and buy-back operations of the June 2024 Eurobond,” says the Devolution Budget Watch 2025 report released yesterday.

The report has also shown that fiscal policy aims to balance consolidation with economic growth support, anchored on stronger revenue performance and rationalisation of non-essential expenditure.

Total revenue is projected at 17.2 per cent of GDP in 2025/2026 and expected to increase to 18.1 per cent over the medium term based on administrative reforms and a broader tax base.

Expenditures are expected to decline from 22 per cent of GDP to approximately 21.1 per cent as fiscal consolidation gains traction.

But achieving these targets will require realistic revenue assumptions and tight expenditure controls especially over non-core recurrent spending.

At the same time, external conditions are expected to weigh on Kenya’s growth prospects as the global economy slows down and policy uncertainty increases.

With global growth projected to ease to 2.8 per cent in 2025 and 3 per cent in 2026, down from 3.3 per cent last year, weakening demand across major export markets will likely dampen Kenya’s external sector performance especially in exports and tourism.

“The escalation of trade tensions due to new US import tariffs and retaliatory measures poses a risk to global supply chains and could induce commodity shortages and price volatility with adverse effect on export revenues. Slower global growth could also slow down remittance inflows,” the report explains.

The PBO has stated that tightening global financial conditions and persistent geopolitical tensions further constrain Kenya’s macroeconomic outlook.

Higher risk premiums for emerging markets coupled with higher interest rates in major economies are expected to sustain upward pressure on Kenya’s borrowing costs and limit access to affordable external financing.

“This environment heightens rollover risks for external debt and constrains fiscal space in the near term. Ongoing geopolitical tensions continue to pose risk to global trade and commodity markets and although global energy and commodity prices have eased, the uncertainty could potentially lead to price volatility,” the report states.

“The resulting combination of weaker external demand, higher global uncertainty and tighter financing conditions underscores a challenging external backdrop for sustaining Kenya’s growth momentum in FY 2025/26.”

As far as domestic outlook is concerned, the PBO report states that the services sector is expected to register a modest improvement, supported by easing domestic pressures and improving macroeconomic conditions.

Recent data shows early signs of resilience, with the sector expanding by 5.5 per cent in the second quarter of 2025 reflecting stabilising demand as inflation moderates and the government assumes an accommodative monetary policy stance.

At the same time, lower interest rates are expected to ease credit costs, improve liquidity conditions and boost business confidence – an important catalyst for activities in wholesale and retail trade, finance, and ICT among other service industries.

And as household purchasing power recovers and operating conditions improve, activity in core service areas is expected to strengthen.

However, the service sector outlook remains subject to downside risks stemming from financing constraints, external uncertainties and uneven sub-sector performance, with a sustained recovery depending on the pace at which private sector credit rebounds, particularly for SMEs engaged in services, where lending has weakened sharply in recent years.

“Externally, the moderation in global growth and persistent geopolitical tensions could weigh on tourism, transport and business services, limiting gains from externally linked sub-sectors. Sub-sectors such as accommodation and food services, transport, real estate and some segments of finance remain vulnerable to reduced demand,” the report reads.

Similarly, unexpected fiscal tightening due to revenue underperformance are expected to dampen public consumption and investment, further constraining activity in the services sector.

On the overall, the services outlook for FY 2025/26 is cautiously positive but heavily contingent on domestic credit conditions, macroeconomic policy support and the stabilization of global economic trends.

On health sector, the report states that the Community Health Promoters (CHP) project is severely underfunded, with only Sh786 million disbursed out of the Sh3 billion allocated in 2024/25.

Currently supporting 107,831 CHPs, the project is co-funded by the national and county governments on a 50:50 basis.

However, according to reports by the Controller of Budget, only four counties - Bomet, Kwale, Tharaka Nithi and Uasin Gishu – received the national government contribution.

With respect to county governments contribution, only 14 counties have contributed and spent on CHPs stipend and payment is therefore not up to date.

This affects the working morale of the CHPs who are expected to form a crucial basis for the achievement of UHC.

On Social Health Authority (SHA), the report states that the financing base is weak as it is heavily dependent on contributions from salaried employees who are a minority in the workforce.

In 2024/25, the formal sector contributed Sh47.5 billion while the informal sector accounted for only Sh23 billion, yet the sector constitutes about 80 per cent of the workforce.

“Anecdotal evidence suggests that of the approximately 27 million registered in SHA, only 4.3 million from the formal sector and approximately 860,000 from the informal sector are contributing to it. This not only leaves a significant financing gap but also shrinks the risk-pool. Non-contribution by majority of the informal sector is largely informed by irregular incomes and affordability concerns,” the budget watch report has shown.