The National Treasury of Kenya has made significant adjustments to its revenue collection targets for the 2025 Budget Policy Statement (BPS), reducing expectations for the Kenya Revenue Authority (KRA).

The ordinary revenue target has been lowered to Ksh 2.835 trillion from the initial projection of Ksh 3.018 trillion. This revision acknowledges the persistent revenue collection challenges KRA has faced in recent years and the sluggish economic performance that has slowed tax revenue growth.

Economic Realities Driving the Revision

The downward revision of revenue projections is largely a reflection of Kenya’s economic slowdown. The country’s economic growth rate fell to 4.6% in 2024, a notable drop from 5.6% in 2023.

According to the Kenya National Bureau of Statistics (KNBS), this decline is attributed to weaker performance across multiple sectors, particularly construction and mining, which recorded negative growth in the third quarter of 2024.

The construction sector, previously a strong driver of economic resilience, contracted by 2% between July and September 2024.

This is a sharp contrast to the 4% growth recorded in the same period in 2023. The decline signals a broader economic slowdown that has impacted revenue collection and led the government to reassess its fiscal targets.

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KRA’s Revenue Shortfalls and Adjustments

As of December 2024, KRA had collected only 44% of its current fiscal year target, falling short of the 50% benchmark expected at the mid-year mark.

This underperformance has been a recurring issue, with the National Assembly Budget and Appropriation Committee repeatedly cautioning Treasury against setting overly ambitious revenue targets without a corresponding expansion in the tax base.

In response, Treasury Cabinet Secretary John Mbadi emphasised a shift towards more realistic revenue projections. “We are more realistic about our revenue collection. The figure that was provided earlier, especially on ordinary revenue of Ksh 3.018 trillion, has since been revised downwards to Ksh 2.835 trillion. This shows you that Treasury is walking the talk,” he stated.

The BPS also revised projections for total revenue, which includes tax revenue and ministerial appropriation-in-aid (AIA), bringing it down to Ksh 3.385 trillion from the earlier estimate of Ksh 3.516 trillion.

Spending Cuts and Fiscal Deficit Management

In line with reduced revenue expectations, the government has cut its spending plans for the 2025/26 financial year by Ksh 66 billion. The revised total expenditure now stands at Ksh 4.263 trillion, reflecting a more constrained fiscal outlook.

To bridge the fiscal deficit, the government plans to borrow Ksh 831 billion, which amounts to 4.3% of GDP. While this is higher than initially planned, it remains lower than the projected deficit of Ksh 862.7 billion for the current financial year.

Treasury officials assert that their fiscal consolidation efforts are yielding results, with borrowing being managed more wisely.

Declining Treasury Bill Rates and Debt Sustainability

One positive outcome of the government’s fiscal discipline has been the decline in interest rates on Treasury Bills. The 91-day Treasury bill rate dropped from 16.1% in January 2024 to 9.11% in February 2025.

Similarly, the 182-day and 364-day Treasury Bills saw significant reductions, improving the government’s borrowing costs.

Despite these improvements, concerns remain over Kenya’s debt levels. The country’s debt-to-GDP ratio has declined to 67% in the 2023/24 fiscal year and is expected to fall further to 63% in 2025/26. However, this remains above the legally mandated threshold of 55%, signalling continued fiscal pressure.

Challenges with Undisbursed Loans

One major issue highlighted by the Parliamentary Budget Office (PBO) is the growing stockpile of undisbursed committed loans, which continue to attract significant commitment fees.

As of June 2024, Kenya had contracted Ksh 1.38 trillion in loans that had yet to be disbursed, leading to the accumulation of approximately Ksh 1.583 billion in commitment fees.

Between June 2016 and June 2024, Kenya incurred a cumulative Ksh 18.9 billion in commitment fees for underutilised loans. These funds, particularly concessional loans with favourable terms from institutions like the World Bank, remain untapped, delaying economic and social benefits.

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Looking Ahead: Economic Outlook and Revenue Strategy

While the Treasury expects economic growth to rebound to 5.3% in 2025, this will depend on improved revenue collection strategies, economic recovery across key sectors, and enhanced fiscal discipline.

The government’s commitment to more realistic revenue targets is a step in the right direction, but success will depend on effective implementation.

For KRA, this means not only improving compliance and efficiency in tax collection but also expanding the tax base to reduce reliance on borrowing.

As Parliament debates the Budget Policy Statement, key stakeholders will be watching closely to see how the government balances fiscal consolidation with economic growth essentials.

Kenya’s 2025 Budget Policy Statement reflects a more realistic approach to revenue collection and government spending. With economic growth slowing and revenue falling short of expectations, the government has adjusted its targets to better align with fiscal realities.

The focus now shifts to implementing these revised projections while ensuring that borrowing remains sustainable and that undisbursed loans are effectively utilised for development.

As the country navigates these financial challenges, the success of these measures will be critical in shaping Kenya’s economic trajectory in the coming years.