Debt burden and optimism cloud Kenya's budget outlook

IPF Chief Executive Daniel Ndirangu speaking during launch of the 2026 annual national shadow budget. [Wilberforce Okwiri,Standard]

Financial think tanks have faulted the government’s ambitious budget for the coming financial year, terming the projection as unrealistic and overly optimistic.

They say the government is at risk of missing its tax revenue targets if it fails to rethink and review its budget plans, according to Institute of Public Finance's (IPF) 2026 Shadow budget. The State targets to collect Sh2.76 trillion tax revenue for the 2026/27 financial year, a target IPF has termed overly optimistic.

According to IPF, overly ambitious macro-fiscal framework will constrain the country's capacity to effectively deliver on its core development priorities.

While the 2026 Budget policy statement projects real GDP growth of 5.3 per cent, the shadow budget notes that the outlook is threatened by downside risks, such as the Iran-USA conflict, which has affected exports and has already caused an increase in fuel prices. 

This ambitious budget also falls few months to the electoral cycle, presenting risks through fiscal pressure, reprioritisation of expenditure and delays in reforms. 

“With the government routinely over projecting revenues, looking at the performance for the past nine months, revenues are likely to underperform significantly by the end of the year,” Veronicah Ndegwa from IPF said. 

Ndegwa reiterated that Kenya’s government has perennially widened the fiscal deficit. “As a consequence, we are paying significant resources on interest  repayments,” Ndegwa said. 

In the financial year 2026/27, out of the Sh4.6 trillion budget estimate, interest payments on debt alone are projected to take Sh1.2 trillion. 

Also, National Government wages and salaries are projected at Sh720.7 billion and Sh 495.5 billion for County total transfers. 

“This consumes Sh2.4 trillion, or 51 per cent of total expenditure, leaving development spending as one of the few adjustable components, making consolidation difficult,” the IPF shadow budget indicates. 

In the report, Kenya’s net borrowing in 2024/25, was Sh1.03 trillion while development spending was only Sh582.9 billion, implying that about Sh451 billion of borrowing financed recurrent expenditure. 

These numbers are expected to rise, given increased borrowing  and commercial and domestic debt. 

IPF has also faulted the government for abusing the use of Article 223, which has shifted financing away from the Contingency Fund and weakened the credibility of the original budget. 

Ndegwa noted that spending under Article 223 has often occurred before Parliamentary approval, weakening legislative oversight. 

While raising transparency concerns, IPF has observed significant shift towards off-budget instruments such as Public–Private Partnership (PPPs) and privatisation, with lower transparency. 

Growing use of securitisation as an additional financing tool of future revenue streams, has been flagged as hidden consolidation risk. 

Daniel Ndirangu, chief executive of IPF has emphasised that reviewing the budget twice a year raises credibility concerns. 

“Kenya’s challenge today is not a lack of policy ambition, but a growing disconnect between what we plan and what we can realistically finance,” Ndirangu noted. 

“Our budget is too rigid, coupled with debt interest repayments, leaving very little for development”.

IPF has urged the Parliament to reprioritise public expenditure towards high-impact programmes that deliver tangible outcomes for citizens. 

“In social protection, for example, we have multiple bursary schemes operating in parallel, leading to duplication, leakages and inequitable access.”  Ndirangu said.

 And with the 2025/26 financial year coming to an end in two months, the national exchequer will be required to raise an average of Sh294.4 billion per month, for the months of April, May and June, to meet its revised revenue targets. 

In the first nine months of FY 2025/26, the government had collected Sh 1.72 trillion, falling short of its target. 

“Meeting the 2026/27 target would require 13 per cent revenue growth, compared to a historical average of eight per cent over the last nine years; and tax buoyancy of 1.4 per cent,” Ndegwa said. 

Already, the revenue projection is facing a weakened credibility such as the reduction of VAT on fuel from, 16 per cent to eight per cent to ease pump pressure caused by the Middle East war.

Alternatively, the government will be forced to borrow so as to fill in its budgetary gap, a move that