National Treasury CS John Mbadi during a press briefingPublic finances are facing renewed strain as revenue
underperformance, rising fiscal risks and growing exposure to global and
climate shocks threaten to narrow the government’s room for manoeuvre,
according to the Draft 2026 Budget Policy Statement.
While the National Treasury projects continued economic
growth and insists that fiscal consolidation remains on track, the policy
document reveals a more constrained reality.
It foresees weaker-than-expected revenue collection,
pressure for supplementary budgets and heightened vulnerability to debt and
external shocks.
This is despite plans to increase the annual expenditure to
about Sh4.65 trillion, an increase of about Sh380 billion from the 2025-26
budget.
By the end of September 2025, total revenue, including
Appropriation-in-Aid, stood at Sh709.6 billion against a target of Sh793.2
billion, leaving a significant shortfall early in the financial year.
Ordinary revenue amounted to Sh573.5 billion, falling below
projections and forcing the Treasury to signal the need for supplementary
estimates.
The policy statement further notes that, based on the
projected revenue and expenditure framework, the fiscal deficit, including
grants, is expected to reach Sh1.1 trillion (5.3 per cent of GDP) in the
2026-27 financial year.
This is from the projected deficit of Sh901 billion (4.7 per
cent of GDP) in the 2025-26 financial year.
“The FY 2026-27 fiscal deficit will be financed through net
external borrowing amounting to Sh99.5 billion (0.5 per cent of GDP) and net
domestic financing of Sh1,006.6 billion (4.8 per cent of GDP),” it says.
To fill the gap, Treasury says it will deepen tax policy and
administrative reforms to expand the tax base, minimise tax expenditures,
enhance compliance and leverage technology to modernise tax processes.
Concurrently, expenditure management will be strengthened
through the full operationalisation of e-procurement, adoption of Zero-Based
Budgeting principles [justifying all expenses], automation of public investment
management, digitisation of pension and payroll systems and accelerated
transition toward accrual accounting, it says.
Given the constrained fiscal space, Treasury says
prioritisation of expenditure will remain essential. Ministries and agencies
will be required to re-examine all existing and proposed programmes and
eliminate low-impact activities.
They will also be required to ensure resource allocation
focuses on high-priority, high-return interventions that drive inclusive
growth, create jobs and increase exports.
The revenue gap comes at a time when the government is
attempting to balance fiscal consolidation with the protection of priority
programmes under the Bottom-Up Economic Transformation Agenda, the Kenya Kwanza
economic blueprint.
But beyond immediate revenue challenges, the policy
statement flags deeper structural risks that could destabilise public finances
if left unaddressed.
Kenya’s ever-increasing debt remains a major concern.
Although Treasury maintains that public debt is sustainable,
it acknowledges significant exposure to macroeconomic shocks, including
exchange rate volatility, tighter global financial conditions and rising
interest costs.
Global growth uncertainty, geopolitical tensions and
elevated trade-policy risks are expected to hit emerging economies, raise
borrowing costs and limit access to concessional financing.
With the government relying on domestic and external
borrowing, this creates a fragile balancing act.
The policy statement warns that adverse changes in
macroeconomic assumptions, such as slower growth, currency depreciation or
higher interest rates, risk worsening debt dynamics, increasing debt-servicing
costs and crowding out development spending.
Already, debt servicing remains one of the largest
expenditure items in the budget, limiting the government’s ability to expand
social spending without raising taxes or borrowing further.
Climate change is explicitly framed not just as an
environmental threat but as a fiscal risk with direct implications for debt
sustainability.
Treasury identifies climate-related shocks such as drought,
which is already causing havoc in Northeastern region, floods and extreme
weather events as potential drivers of unplanned expenditure, revenue losses
and increased borrowing.
Agriculture, energy and infrastructure sectors are
particularly vulnerable, exposing the budget to sudden financing pressures
during climate emergencies.
The BPS further notes that these risks can crystallise into
contingent liabilities for the government, adding that climate shocks may force
the state to intervene through subsidies, reconstruction spending or emergency
support, which is often outside the original budget.
Such pressures could further strain fiscal discipline and
undermine consolidation efforts, especially if shocks coincide with periods of
weak revenue performance.
The Treasury’s strategy hinges on improving revenue
mobilisation, tightening expenditure controls and managing debt prudently,
while scaling up public-private partnerships to reduce pressure on public
finances.
Without outrightly saying it, Treasury is painting a
delicate balancing act in efforts to raise more revenue without triggering
economic or political backlash ahead of the 2027 polls.