Kenya’s National Treasury has unveiled its Budget Policy Statement (BPS) for the fiscal year 2025/26, presenting an ambitious increase in the nation’s budget estimates to KSh 4.26 trillion, up from KSh 3.98 trillion in the 2024/25 fiscal year. This shift reflects the government’s continuing efforts to balance economic transformation and fiscal discipline, while also responding to the increasing needs for public service and infrastructure development across the country.

The announcement was made public on May 4, 2025, and comes amid an evolving global economic environment. The BPS, which outlines the government’s planned fiscal policy for the coming year, is a vital document that informs the allocation of national resources across various sectors, with particular attention being given to the Bottom-Up Economic Transformation Agenda (BETA) that seeks to create inclusive economic growth.

Overview of the Budget for 2025/26

The Kenyan government has projected a total revenue of KSh 3.39 trillion for FY 2025/26, representing approximately 17.6% of the country’s Gross Domestic Product (GDP). This figure marks an increase from the previous year’s projection of KSh 3.07 trillion. Ordinary revenue, which comprises the bulk of the government’s income, is expected to reach KSh 2.84 trillion, with additional funding coming from Appropriation-in-Aid (A-i-A), an amount that is drawn from the government’s own revenue-generating initiatives, such as the sale of public assets or fees collected by state institutions.

The rise in revenue is attributed to ongoing reforms in Kenya’s tax policy and administration, which are aimed at enhancing compliance, expanding the tax base, and improving the efficiency of revenue collection processes. These reforms have been central to the government’s broader strategy of modernizing the tax system, closing existing loopholes, and fostering a more equitable taxation structure.

Government Spending Plans for FY 2025/26

On the expenditure side, the government’s total planned expenditure for FY 2025/26 is set at KSh 4.26 trillion, which represents 22.1% of GDP. The bulk of this spending, KSh 3.1 trillion, is earmarked for recurrent expenditure. This includes costs associated with the day-to-day operations of the government, such as civil servant salaries, security, and public administration. These recurrent costs are crucial to maintaining the functional capacity of the government, ensuring that services are delivered to citizens effectively.

A substantial portion of the budget, KSh 725.1 billion, is allocated to development projects. These projects are focused on critical infrastructure and investments in sectors like energy, transportation, healthcare, education, and agriculture. This allocation highlights the government’s commitment to facilitating long-term economic growth by investing in the physical and social infrastructure necessary to support a growing population and a developing economy.

In line with Kenya’s decentralized governance structure, KSh 436.7 billion is also allocated to county governments. This transfer is essential for ensuring that counties have the resources they need to provide local services, implement development projects, and meet the specific needs of their populations.

In addition, KSh 5 billion has been set aside for the Contingency Fund, which is a reserve intended for use in emergency situations, such as natural disasters or unforeseen economic shocks. The fund plays a critical role in ensuring that the government can respond swiftly and effectively to national crises.

Efforts to Improve Public Expenditure Efficiency

While the budget has seen an increase in spending, the government has emphasized the need for improved efficiency in the management of public resources. To strengthen expenditure control, the Treasury has proposed several measures aimed at maximizing value for money in public spending. These include the rationalization and reduction of non-essential expenditure, as well as the roll-out of an end-to-end e-procurement system. The e-procurement system is expected to streamline procurement processes, increase transparency, and reduce corruption risks in public procurement.

Additionally, the government plans to operationalize the Public Investment Management Information System (PIMIS), which is designed to automate the public investment management process and ensure that public projects are implemented on time and within budget. Another key initiative is the revamping of the public service pension administration system, which will be digitized to improve efficiency and reduce delays in pension payments to retired public servants.

These reforms are in line with the broader push for better governance and the adoption of digital tools to enhance public sector management and service delivery. The aim is to ensure that public resources are used efficiently and that citizens receive value from the government’s investments.

Managing Kenya’s Public Debt

Despite the substantial increase in government spending, the Treasury has also focused on managing Kenya’s public debt levels. The fiscal deficit for FY 2025/26 is projected to narrow to KSh 831 billion, or 4.3% of GDP, down from KSh 862.7 billion in FY 2024/25. The reduction in the deficit is seen as an important step towards fiscal consolidation, which aims to stabilize the country’s debt levels while ensuring that essential services continue to be provided.

The deficit will be financed through a combination of domestic and external borrowing. KSh 146.8 billion will be sourced from external borrowing, while KSh 684.2 billion will be raised through net domestic borrowing. This approach is reflective of Kenya’s ongoing efforts to balance fiscal sustainability with the need for funding to support development initiatives.

The Finance Bill 2025

In conjunction with the Budget Policy Statement, the government has also proposed the Finance Bill 2025, which introduces several significant changes to Kenya’s tax laws. One of the notable changes is the increase in the tax-free daily allowance for private sector employees traveling for business purposes. The tax-free limit for travel and subsistence allowances will rise from KSh 2,000 to KSh 10,000. This adjustment is intended to make the tax system more responsive to the realities of modern business travel and to support the growth of the private sector.

Another key provision in the Finance Bill 2025 is the expansion of the Significant Economic Presence (SEP) tax to cover all online income, removing the KSh 5 million threshold for non-residents. This change is aimed at ensuring that international businesses that generate income from Kenyan consumers, particularly in the digital economy, contribute fairly to the country’s tax base. Additionally, the Bill proposes replacing gender-specific terms like “husband” with more inclusive language such as “spouse” in pension provisions, reflecting Kenya’s broader commitment to gender equality and inclusivity.

Addressing Challenges and Opportunities

The increase in Kenya’s budget estimates and the accompanying reforms reflect the government’s recognition of both the challenges and opportunities that lie ahead. On one hand, Kenya continues to grapple with global economic headwinds, including rising interest rates, inflation, and supply chain disruptions. On the other hand, the country is positioning itself as a regional economic powerhouse, with a rapidly expanding digital economy, a burgeoning middle class, and a growing entrepreneurial ecosystem.

To achieve the ambitious goals set out in the Budget Policy Statement, the government must continue to prioritize fiscal discipline, enhance revenue collection, and ensure that public spending is directed towards projects that have a tangible impact on economic growth and poverty reduction.

Kenya’s economy is at a pivotal moment, and the 2025/26 Budget represents a critical step towards achieving sustainable development. The government’s focus on infrastructure, public service delivery, and fiscal consolidation, coupled with reforms in tax administration and public spending efficiency, should lay a solid foundation for future growth.

Conclusion

Kenya’s increased budget estimates for FY 2025/26 signal the government’s commitment to addressing the nation’s development needs and fostering economic transformation. The proposed reforms in revenue collection, expenditure management, and tax laws reflect a forward-thinking approach to economic governance. However, the success of these initiatives will depend on the effective implementation of policies and the continued cooperation of all sectors of society in supporting the government’s vision for inclusive growth and fiscal sustainability. The coming year will be crucial in determining how well Kenya can manage its resources and position itself as a leader in the region’s economic development.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

3rd May, 2025