By CPA Peter Kibet Kitur
Kenya’s Fy2026/27 Post-Budget Analysis
The Budget comes at a particularly uncertain time for the global economy. Escalating geopolitical tensions across the Middle East, the continuing conflict between Russia and Ukraine, growing strategic rivalry between the United States and China, increasing trade protectionism, and persistent disruptions to global supply chains continue to reshape international trade and financial markets. These developments have heightened uncertainty over commodity prices, capital flows, inflation, and investor confidence. As a highly import-dependent economy with significant external financing needs, Kenya remains particularly vulnerable to these global shocks.
Although Kenya has demonstrated resilience, the domestic economy has not been immune.According to the Kenya National Bureau of Statistics (KNBS), real GDP growth slowed from 5.7 per cent in 2023 to 4.7 per cent in 2024, with growth estimated at approximately 4.6 per cent in 2025. Agriculture, financial services, construction, transport, mining, real estate, and tourism remained the principal drivers of economic activity. While exports increased to approximately KSh 1.1 trillion, Kenya continues to record a substantial trade deficit and relies heavily on imported fuel, industrial inputs, machinery, pharmaceuticals, and food products. This dependence exposes the country to external inflationary pressures that remain largely beyond domestic policy control.
The FY2026/27 Budget provides for expenditure of KSh 4.82 trillion against projected revenues of KSh 3.63 trillion, resulting in a fiscal deficit of KSh 1.146 trillion, which will mainly be financed through domestic borrowing. Although the Government aims to reduce the fiscal deficit to 3.3 per cent of GDP by FY2028/29, achieving this objective appears increasingly challenging. Revenue projections depend on successful tax reforms, stronger compliance, and sustained economic expansion—assumptions that have consistently proven optimistic. Kenya has repeatedly experienced revenue shortfalls due to delayed reforms, administrative inefficiencies, tax avoidance, and a narrowing effective tax base. Unless economic growth substantially exceeds recent performance, revenue targets may once again fall short.
The Finance Act, 2026 gives legal effect to the revenue measures supporting Kenya’s FY2026/27 Budget and advances the Government’s Bottom-Up Economic Transformation Agenda (BETA). It amends key tax laws, including the Income Tax Act, Value Added Tax Act, Excise Duty Act, Tax Procedures Act, Stamp Duty Act, Miscellaneous Fees and Levies Act, and provisions of the East African Community Customs Management Act.
The Budget continues significant investment under BETA, allocating KSh 395.15 billion to healthcare, housing, agriculture, the digital economy, and MSMEs, alongside substantial funding for education, infrastructure, security, environmental conservation, and programmes supporting women and youth. While these investments remain important for long-term development, fiscal pressures may increasingly constrain their effective implementation. Historically, ambitious budget allocations have often been undermined by delayed procurement, pending bills, funding shortfalls, and weak project execution.
Public financial management reforms remain a positive feature of the Budget. The Treasury Single Account, accrual accounting reforms, electronic procurement, strengthened public investment management, and improved public asset management are expected to enhance transparency and accountability. Nevertheless, Kenya’s history demonstrates that institutional reforms alone rarely guarantee better service delivery. Without stronger oversight, reduced political interference, and improved enforcement, governance weaknesses may continue to dilute the expected benefits.
The Finance Act further expands digital tax administration through eTIMS, Virtual Electronic Tax Registers, Artificial Intelligence-enabled compliance systems, Ushuru GPT, electronic customs systems, and pre-populated tax returns. The number of active taxpayers has increased from 6.5 million to 6.6 million, while more than 655,000 taxpayers have joined eTIMS. Although these reforms improve tax administration, technology cannot fully overcome structural weaknesses. A large informal economy, widespread cash transactions, tax evasion, compliance costs, and limited administrative capacity continue to constrain revenue mobilisation. Digital enforcement may improve compliance among formal businesses while leaving significant portions of the informal economy largely outside the tax net.
For businesses, the Finance Act presents both opportunities and additional obligations. The reintroduced tax amnesty offers relief on historical tax liabilities, while sector-specific incentives encourage investment. However, enhanced digital surveillance and data-driven compliance substantially increase regulatory obligations. Many MSMEs already contend with rising energy costs, expensive credit, exchange rate uncertainty, and weak consumer demand. Additional compliance requirements may therefore increase operating costs without necessarily stimulating greater investment.
The Government’s macroeconomic assumptions also deserve careful scrutiny. Growth projections rely heavily on a significant recovery in private investment despite persistently high lending rates, elevated electricity costs, infrastructure bottlenecks, and policy uncertainty. More importantly, they assume a relatively stable global environment at a time when international risks continue to intensify. Further escalation of conflicts in the Middle East could disrupt global oil supplies, sharply increasing fuel prices and transport costs. Continued instability in Eastern Europe may prolong food and fertiliser price pressures, while worsening trade tensions between major economies could weaken global demand and reduce foreign investment into emerging markets such as Kenya.
Revenue projections are similarly exposed to downside risks. Kenya’s fiscal history suggests that ambitious revenue targets are often exceeded in practice due to delayed implementation, administrative weaknesses, litigation, and slower-than-expected economic activity. Previous tax amnesties have generated temporary gains but have not fundamentally expanded the tax base. Should economic growth weaken further because of global or domestic shocks, revenue performance could deteriorate significantly, widening the fiscal deficit beyond current projections.
Exchange rate stability also remains highly uncertain. Although the Kenya Shilling has recently stabilised against the US Dollar, global financial markets remain exceptionally volatile. Any strengthening of the Dollar, capital flight from emerging markets, or sustained increase in oil prices could place renewed pressure on the Shilling. Currency depreciation would increase import costs, accelerate inflation, raise external debt-servicing obligations, and further strain already stretched public finances.
Inflation risks also appear tilted to the upside. Expectations that inflation will remain within the Government’s target range depend on stable weather conditions, adequate food production, and moderate international fuel prices. Yet climate change continues to increase the frequency of droughts and floods across East Africa, while geopolitical tensions continue to threaten global energy markets. A combination of poor harvests and sustained increases in oil prices could significantly raise the cost of living, weaken household purchasing power, reduce business profitability, and ultimately suppress economic growth.
Heavy reliance on domestic borrowing presents another significant concern. While domestic financing reduces foreign exchange exposure, sustained government borrowing risks crowding out private sector credit through higher interest rates. This could discourage private investment precisely when Kenya requires stronger business expansion to create employment and stimulate growth. Simultaneously, rising debt-servicing costs continue to absorb an increasing share of government revenue, reducing fiscal space for essential development expenditure.
Ultimately, the greatest risk facing the FY2026/27 Budget is not the quality of its policy proposals but the increasingly uncertain economic environment in which they must be implemented. Even well-designed reforms may struggle to deliver their intended outcomes if global geopolitical tensions intensify, commodity prices remain volatile, climate shocks persist, or investor confidence weakens. Combined with domestic governance challenges and fiscal constraints, these external pressures significantly increase the risk that revenue targets, growth projections, and development objectives may not be fully realised.
Conclusion
The FY2026/27 Budget and the Finance Act, 2026 present a comprehensive policy framework intended to preserve macroeconomic stability while supporting long-term development. Continued investment in agriculture, healthcare, education, housing, infrastructure, digital transformation, and MSMEs demonstrates the Government’s development priorities. Likewise, reforms in tax administration and public financial management represent important institutional improvements.
However, the broader outlook is considerably less reassuring than the Budget suggests. The underlying assumptions depend on a favourable combination of strong domestic implementation, improving private investment, stable global commodity markets, contained geopolitical tensions, and continued external financing—conditions that appear increasingly uncertain. The world economy is entering a period of heightened geopolitical fragmentation, slowing growth, elevated debt levels, and persistent climate risks, all of which disproportionately affect import-dependent developing economies such as Kenya.
Consequently, while the Finance Act introduces several practical and business-friendly reforms, its success will ultimately depend on factors extending well beyond domestic tax policy. Unless Kenya strengthens fiscal discipline, accelerates structural reforms, improves governance, and builds greater resilience against external shocks, the country’s fiscal ambitions may once again outpace economic reality. The true measure of success will not lie in the Budget’s policy announcements, but in its ability to withstand an increasingly volatile global environment while delivering tangible improvements in livelihoods, business confidence, employment, and sustainable economic growth.
The writer is an Associate Partner with Bon and Drew Associates, chairs a public entity audit committee, is the ICPAK Central Rift Region’s Immediate Branch Chairman and a member of ICPAK’s Devolution subcommittee.
