The World Bank has proposed a raft of reforms in Kenya’s fiscal policy to help tackle debt and spur economic growth.
In its Public Finance Review 2025 titled Beyond the Budget: Fiscal Policy for Growth and Jobs, the World Bank proposes fiscal and structural reforms designed to slash debt, ignite economic growth, create jobs, and restore equity.
At a time when Kenya teeters on the edge of fiscal instability, with public debt at a staggering 68 per cent of GDP and public trust in government institutions eroded by corruption and inefficiency, the report lays out a visionary roadmap.
Far from the grim options of fiscal slippage or harsh austerity, the World Bank charts a “third way” that could reduce Kenya’s debt-to-GDP ratio to 44 per cent by 2035, boost GDP by 7.1 per cent, lift labour productivity by 6.4 per cent, and raise real wages and consumption by 4 per cent.
Kenya’s fiscal landscape is fraught with peril. Interest payments on public debt devour over a third of government revenues, squeezing out funding for critical services like healthcare, education, and social protection.
The tax base has been shrinking since 2013, hobbled by low productivity in agriculture and informal services, declining exports, and a web of tax exemptions that favour the wealthy. Afrobarometer surveys reveal profound public disillusionment: Less than half of Kenyans trust their institutions, and 60 per cent believe corruption worsened in 2024.
The violent protests that forced the withdrawal of the Finance Bill 2024 exposed this discontent, as citizens rejected policies they perceived as unfair.
Meanwhile, budget rigidity, with 86 per cent of revenues locked into interest, county transfers, and wages, leaves little room for development. Pending bills, exceeding 4 per cent of GDP, signal chronic inefficiencies, while state-owned enterprises (SOEs) drain resources in competitive sectors.
Against this backdrop, the World Bank’s proposed reforms are anchored on the phrase “Kuna njia nyingine” (There is another way).
Key recommendations focus on reducing expenditure and increasing revenue. To curb spending, the report advises cutting the public sector’s travel budget by 50 per cent, standardising per diems, freezing hiring for two years, and divesting state-owned enterprises.
Revenue-enhancing measures include reforming personal and corporate income tax, removing regressive VAT exemptions, introducing carbon taxes, and strengthening tax compliance.
Improving public financial management through e-procurement, public-private partnerships, and the Treasury Single Account is also emphasised. Sector-specific reforms call for increased spending on health, education, and social protection, while improving efficiency in agriculture, especially by reforming the fertiliser subsidy program.
To strengthen domestic revenue mobilisation and tax progressivity, the World Bank recommends enhancing the tax system’s efficiency and equity while reducing exemptions and distortions that narrow the tax base.
Key reforms include reforming Personal Income Tax (PIT) and payroll levies by adjusting tax rates for top and bottom decile earners to reduce average PIT rates and levies on low-wage workers, and phasing out mortgage interest rate deductions.
It also suggests rationalising Corporate Income Tax (CIT) exemptions by phasing out inefficient and regressive tax exemptions, including for collective investment schemes and certain capital gains.
Reforming Value Added Tax (VAT) by eliminating regressive VAT exemptions is also proposed, ideally as part of a broader policy package to minimise adverse effects on poverty and consumption.
The heart of the PFR lies in five ambitious policy packages, each designed to transform a facet of Kenya’s economy.
The first, “From Rents to Public Services,” tackles governance head-on. By curbing corruption and improving public investment efficiency, it could drive 2.98 per cent GDP growth and cut the debt-to-GDP ratio by 11.19 per cent.
The second, “From Defensive to Competitive Private Sector,” pairs trade liberalisation with fiscal reforms to boost competitiveness, projecting 1.86 per cent GDP growth and a 7.6 per cent debt reduction.
The third, “From Public to Private Firms,” focuses on divesting SOEs in competitive sectors, potentially raising $1.2 billion and increasing GDP by 0.96 per cent while reducing debt by 3.47 per cent.
The fourth, “From Subsidising Consumption to Supporting the Poor,” reforms VAT and subsidies, increasing social transfers to cushion the poor. However, it slightly lowers GDP by 0.11 per cent while cutting debt by 0.88 per cent.
The fifth, “From Consumption Cities to Production Hubs,” leverages property taxes and public sector savings to transform Nairobi and Naivasha into engines of growth, boosting GDP by 1.23 per cent and reducing debt by 1.33 per cent.
Implementing these reforms requires careful sequencing to build public support and political momentum.
In the short term, for the FY2025/26 budget, the World Bank urges prioritising governance reforms, consumption taxes, and quick expenditure cuts, such as halving travel budgets and streamlining fertiliser subsidies.
Over the next six to twelve months, accelerating e-procurement and SOE divestitures could yield results.
In the long term, combining all five packages would maximise fiscal space, enabling increased spending on health and education, estimated to need an additional 4 per cent of GDP, while meeting the 2029 debt target of 55 per cent of GDP in net present value terms.
The Kenya World Bank Macro-Fiscal Model (KENMOD) underpins these projections, showing that the reforms could create a virtuous cycle of growth, equity, and fiscal sustainability.
Yet, the path forward is not without challenges. Public resistance to tax hikes, as seen with the Finance Bill 2024, underscores the need for transparent communication and visible service improvements.
Governance reforms demand sustained political will to combat entrenched corruption. The success of KENMOD’s projections hinges on effective implementation, a tall order given Kenya’s history of fiscal slippage. Still, the World Bank’s vision is compelling: a Kenya where fiscal policy drives prosperity, not just balances budgets.
By embracing these reforms, the government could rebuild trust, reduce inequality, and unlock the nation’s economic potential.
