Headwinds ahead: What could derail Kenya's Sh4.2 trillion budget

Treasury CS John Mbadi reads the budget at Parliament Buildings, Nairobi. June 12th,2025 [Elvis Ogina, Standard]

A downgraded economic growth of 4.5 per cent by the World Bank is among key economic challenges that National Treasury and Economic Planning Cabinet Secretary John Mbadi will face while executing his maiden budget.

Additionally, the infamous trade tariffs instituted by US President Donald Trump, anxiety around renewal of the African Growth Opportunity Act (Agoa) that expires in September this year, inflation, and interest rates are the other headwinds expected during the 2025/2026 financial year.

While the inflation rate has been stable for the months preceding this budget, how sustainable it will be during the financial year will determine the performance of the economy.

Consequently, this will then dictate if the government will realise the Sh2.7 trillion in ordinary revenue to finance the Sh4.2 trillion budget.

The Global Economic Prospect report by the World Bank, published this month, projects Kenya’s economy to grow by 4.5 per cent in 2025, a revised rate from five per cent as reported in January.

However, this growth is still above sub-Saharan Africa forecast of 3.7 per cent in 2025 and 4.2 per cent in 2026.

Kenya’s downgraded growth is a result of the headwinds that the region is facing, which range from heightened trade barriers, which are expected to weaken export demand, to debt and fiscal consolidation efforts.

“However, weaker export demand means revenues for commodity exporters are set to fall, increasing pressure on their public finances. Furthermore, interest rate burdens across the region are set to rise further in 2025, partly offsetting the expected improvements in primary fiscal balances,” says the World Bank in the report.

The 2025/2026 budget has been pegged on a growth of 5.3 per cent as documented in the Report on the Consideration of the Estimates of Revenues and Expenditures for FY 2025-2026 and Medium Term.

The report is prepared by the National Assembly Budget and Appropriation Committee chaired by Samuel Atandi (Alego Usonga).

“This growth forecast is anchored on anticipated improvements in the agricultural sector, largely driven by favourable weather conditions and government interventions aimed at enhancing productivity, such as the fertiliser subsidy programme,” the report says.

This growth is expected to improve collections in ordinary revenue by Sh176.1 billion with growth in income tax, excise duty, and value added tax (VAT).

“The committee noted that this positive revenue performance outlook hinges on ongoing revenue-enhancing measures such as the implementation of the National Tax Policy, Medium-Term Revenue Strategy, continued rollout of the electronic Tax Invoice Management System eTIMS and compliance efforts targeting VAT and excise duty among other tax administration reforms,” the report reads.

According to PKF in Eastern Africa's chief executive, Alpesh Vallabhdas Vadher, the economy is at a good point, referencing low interest rates, an inflation rate under control and stable food prices.

He said the country needs efficiency in expenditure, which can grow the economy by between seven per cent to 7.5  per cent annually.

He cited the eight per cent and 12 per cent rates for 91-day and 364-day National Treasury T-Bills, respectively, as another sign that the key metrics of the economy are stable.

This is compared to the once 18 per cent interest the National Treasury was offering a year ago when it came to the market for money to finance its expenditures.

“These rates are on a downward trend because our inflation is also coming down,” he said. “It is very important to understand that managing our inflation will also manage our cost of living and manage forex rates.”

In 2024, Kenya’s economy grew by 4.7 per cent against a forecast of 5.3 per cent. This grew the country’s nominal GDP to Sh16.2 trillion. Accommodation and food services sector grew the most during the period.

The Gen Z protest that lasted for three months in 2024 was among the headwinds that brought the economy to a standstill slowing its growth. "In fact at one point we thought it would drop to 4.6 per cent," said CS Mbadi during the launch of the 2025 Economic Survey Report.

In 2023, the economy had expanded by 5.7 per cent. However, a major challenge with this growth has always been that the change is not being felt by those in the lower strata of the economy.

PKF Eastern Africa Director James Mulili said this might be the reason why the Finance Bill, 2025 avoids direct taxes to mwananchi.

“The testament we have for the Finance Bill, 2025, is that it has, to a large extent, sort of steered clear of coming up with a lot of controversial amendments that touch on the Wanjiku,” he said during the audit and tax firm pre-budget briefing.

National Treasury has a target of Sh26 trillion in nominal GDP by 2029 which Mr Vadher, who heads the audit and tax consultancy firm, said means a 10 to 11 per cent year on year growth.

“If we can bring in more efficiency, we can look at making sure we spend our funds in the right areas, then we can fast-track our economic growth, and it can be 7.0 to 7.5 per cent and can boost the per capita income for mwananchi,” he said Vadher.

The Central Bank of Kenya forecasts that the economy will grow by 5.2 per cent in 2025 and 5.4 per cent in 2026. “Without those tariffs, we had expected that the economy would grow by 5.4 per cent this year and a further 5.6 per cent in 2026,” said CBK Governor Dr Kamau Thugge during a briefing of the Monetary Policy Committee (MPC).

The construction sector, which contracted in 2024 by 0.3 per cent, is one of the areas where CBK is pegging its optimism for the 5.2 per cent growth in 2025.

Dr Thugge explained that the slowdown was partly related to pending bills and high interest rates witnessed for the better part of 2024. “We expect that (lower interest rates) to have an impact on the sector,” he said.

On June 10, the MPC further reduced the base lending rate by 25 basis points to 9.75 per cent owing to lower inflation that stood at 3.8 per cent in May. This is below the midpoint of the 5.0 + or - 2.5 per cent target.

So far, since August last year, CBK has lowered the base lending rate by 325 basis points. “We expect with this further reduction in CBR (Central Bank Rate), the commercial banks will continue to lower their lending rates,” said CBK boss.