Kenya’s Draft 2026 Budget Policy Statement (BPS) shows a widening fiscal deficit, now projected at Kshs 1,106.1 billion, equivalent to 5.3% of GDP, compared to 4.7% in FY 2025/26.
As the BPS notes, “The fiscal deficit (including grants) is projected to increase to Kshs 1,106.1 bn in FY 2026/27 from Kshs 901.0 bn in FY 2025/26, with the deficit as a share of GDP rising slightly to 5.3% from 4.7%.”
This revision highlights the growing gap between revenue and expenditure, moving further away from the government’s earlier ambition of keeping the deficit below 4.0% of GDP.
Key Fiscal Framework Adjustments
| Indicator | FY 2025/26 Budget | FY 2026/27 Draft BPS | % Change | Share of GDP FY 2026/27 |
|---|---|---|---|---|
| Total Revenue | Kshs 3,321.7 bn | Kshs 3,487.0 bn | +5.0% | 16.7% |
| External Grants | Kshs 47.2 bn | Kshs 48.8 bn | +3.4% | — |
| Total Expenditure | Kshs 4,269.9 bn | Kshs 4,641.9 bn | +8.7% | 22.0% |
| Fiscal Deficit (incl. grants) | Kshs 901.0 bn | Kshs 1,106.1 bn | +22.8% | 5.3% |
| Net Domestic Borrowing | Kshs 613.5 bn | Kshs 1,006.6 bn | +64.1% | 4.8% |
| Net Foreign Borrowing | Kshs 287.4 bn | Kshs 99.5 bn | –65.4% | 0.5% |
| GDP Estimate | Kshs 19,006.2 bn | Kshs 20,916.8 bn | +10.1% | — |
Revenue Pressures
The BPS projects total revenue at Kshs 3,487.0 billion, a 5% increase from FY 2025/26. However, ordinary revenue continues to struggle. The statement acknowledges that “Revenue collection, inclusive of grants, recorded a slower growth… reflecting challenges in meeting targets during the period. This underperformance was primarily due to below-target tax collections… affected by economic disruptions and a slowdown in business activities.”
To address this, the Finance Bill 2025 introduced reforms such as restrictions on tax loss carryovers, adjustments to capital gains, and reduced digital asset tax rates to stimulate compliance and broaden the tax base.
Expenditure Trends
Total expenditure is projected at Kshs 4,641.9 billion, with recurrent expenditure at Kshs 3,431.2 billion (+9.5%) and development expenditure at Kshs 759.1 billion (+17.0%).
As the BPS highlights, “Recurrent expenditure remains the largest share of total spending, accounting for 73.9%, with development expenditure at 16.4%.”
County allocations, however, are set to decline by 7.9%, reflecting tighter fiscal consolidation.
Borrowing Strategy
The borrowing plan has shifted dramatically:
- Domestic borrowing rises to Kshs 1,006.6 billion, up 64.1%.
- Foreign borrowing drops to Kshs 99.5 billion, down 65.4%.
The BPS explains, “Total borrowing is projected to rise to Kshs 1,106.1 bn… comprising net foreign borrowing of Kshs 99.5 bn and net domestic borrowing of Kshs 1,006.6 bn, reflecting the financing of the fiscal deficit.”
This recalibration signals heavier reliance on domestic markets, with external financing options narrowing.
Debt Sustainability Concerns
Kenya’s debt service-to-revenue ratio remains elevated at 64.2%, well above the IMF’s recommended 30%. The BPS acknowledges debt pressures, noting the need for “fiscal consolidation through reduced debt accumulation to ease the country’s overall debt burden.”
Proposed measures include prioritising concessional borrowing, strengthening capital markets, and enhancing efficiency in the Public Debt Management Office.
Next Steps
The Draft 2026 BPS is open for public feedback until January 9, 2026. Stakeholder input will inform Cabinet approval and parliamentary debate, shaping Kenya’s fiscal trajectory for FY 2026/27.
