The World Bank has warned that Kenya’s fiscal health is increasingly under pressure due to a fragile economic outlook, a rising risk of debt distress and government's heavy involvement in markets.
In its latest report, the lender highlights the narrowing room for manoeuvre in the country’s economic growth, driven by ballooning debt servicing costs, persistent revenue shortfalls, slow economic growth and state's involvement in too much business.
According to the Levelling the Playing Field report released on Tuesday, June 24, state-owned enterprises (SOEs) are dominating sectors that could be better served by private firms, causing deepening inequality, and limiting opportunities for private sector growth.
The report reads in part, “State participation in markets that the private sector can effectively serve and regulations that favour state-owned businesses further limit the size of domestic markets available for firms.”
According to the world Bank report, by 2023, state-linked businesses were active in close to or more than half of Kenya’s key business sectors, including Industrialization, hospitality, manufacturing and retail sectors, benefiting from favourable regulations that give them an unfair edge.
This creates an uneven playing field, shrinking the space for private firms and local entrepreneurs to thrive, the report notes.
" Some state-owned businesses benefit disproportionately from favourable regulations, creating an unlevel playing field for firms". adds the report.
The World Bank, says that Kenya is facing a reversal in poverty reduction progress because of the mounting sovereign debt and market distortions, further sinking the country's economic growth and poverty reduction prospects.
Kenya is also facing fiscal pressure having spent more on debt interest payments between 2019 and 2021, than on healthcare. The lender warns that rising debt repayments and limited access to external financing are forcing Kenya to consider fiscal consolidation or even debt restructuring.
The World Bank has stressed that for poverty to fall, Kenya must level the economic playing field, reduce state interference in competitive markets, and give space for the private sector to grow, insisting, “Policies that promote equity and opportunity will be crucial to making growth work for all,”
The report calls for smarter, fairer tax and spending policies that don’t overburden the poor.
Debt Servicing Plague.
In its Kenya Economic Update and Kenya Public Finance Review report released earlier this month, the lender warned of the debt servicing crisis.
“Kenya’s public debt remains at high risk of distress, with interest payments absorbing about a third of tax revenue,” the report reads in part.
It adds that public debt stood at 68 per cent of gross domestic product (GDP) in 2024, classifying Kenya as being at high risk of debt distress.
Nevertheless, it notes that despite expenditure reductions, revenue shortfalls due to sluggish economic activity have led to a higher-than-expected fiscal deficit and risks the continued build-up of pending bills.
Kenya’s fiscal deficit is estimated at 5.1 per cent of GDP this financial year, but the National Treasury aims to reduce it to 4.5 per cent in 2025/2026.
Generally, the fragile fiscal landscape is despite improvements in some macroeconomic indicators, including declining inflation, a stabilised exchange rate and stronger international reserves, the report reads.
Insufficient job creation
“Despite improvements in Kenya’s macroeconomic indicators, the country continues to face structural challenges, including insufficient job creation and low wages, especially among the youth,” Fan said.
The lender further asserts in the report that the current fiscal situation highlights significant underlying challenges.
First, it attributes the imbalances to Kenya’s unsustainable growth trajectory since the early 2010s, compounded by inefficient and distortionary fiscal policies.
Second, it points out that inadequate delivery of public services and ongoing governance concerns have eroded the social contract.
The World Bank, therefore, calls for revenue policies aimed at improving both the efficiency and fairness of the tax system.
Personal income tax
It recommends formalising the economy, making the tax system fairer by reforming personal income tax, improving tax incentives, and reducing unnecessary exemptions in both personal and corporate taxes.
The report also advocates for improving the efficiency of VAT exemptions and expanding the VAT tax base by removing exemptions that offer limited progressivity.
It also emphasises that strengthening tax compliance through improved enforcement, better taxpayer education, and simplified tax procedures would help improve the fiscal situation.
