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Kenya’s failure to meet its tax collection goals has opened up a significant budget hole, forcing the National Treasury to slash its targets and complicating the country's efforts to secure fresh financial support from the International Monetary Fund (IMF).
Since July 2024, the Treasury has trimmed its revenue expectations for the financial year by Sh516 billion.
The government initially aimed to collect Sh2.917 trillion when it unveiled the 2024/25 budget but has had to scale that figure back by nearly 18 per cent.
Despite these challenges, Kenya is seeking a new financing deal with the IMF.
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Talks are ongoing for a follow-up programme that would address the remaining fiscal and structural challenges.
The IMF has confirmed its willingness to continue supporting Kenya but emphasised that renewed assistance would hinge on stronger budgetary discipline and clear reforms.
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“It’s good to see that the economy has been performing quite well in some parts, and the current account deficit is narrowing. There are quite a lot of strides. However, there are fiscal challenges, which are a significant part of the last programme’s objectives and that need to be addressed,” said Abebe Sellasie, director of the IMF’s African Department.
Kenya’s difficulties come after its earlier arrangement under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) faltered.
These programmes, launched during the Covid-19 crisis to help Kenya manage budget strains and limited global borrowing options, were expected to strengthen economic fundamentals.
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However, Kenya fell short of meeting 11 conditions attached to the programme, leading to the cancellation of the ninth review.
As a result, the country lost access to about Sh110 billion ($850.9 million) in expected funding.
Concerns cited by the IMF included irregular spending of fuel levy collections and the failure to push through reforms at key State-owned enterprises like Kenya Airways.
The collapse of the EFF/ECF arrangement has left Kenya facing a budget gap that may force it to either ramp up borrowing or implement painful spending cuts.
The IMF has warned that without corrective actions, Kenya would have missed key targets even before the programme’s scheduled expiry date of April 1, 2025.
In a statement last month, the IMF stressed that future support would depend on both an honest assessment of Kenya’s past performance and credible commitments to reforms going forward.
New approach to 2025/26 Budget
Following the 2024 tax protests that led to the withdrawal of the Finance Bill 2024, Treasury is adopting a new approach for the 2025 fiscal year.
The government aims to enhance revenue collection through improved enforcement and digital systems, rather than introducing significant new taxes.
This strategy includes implementing camera-based traffic enforcement to penalise violations and expanding e-government services to reduce revenue leaks and improve compliance.
The Treasury is also emphasising public participation in the budgeting process to rebuild trust following the previous year's unrest.
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The shift in fiscal policy comes as Kenya faces challenges in meeting its revenue targets, having reduced tax collection goals by Sh516 billion for the fiscal year ending June 2025.
The International Monetary Fund (IMF) has indicated its readiness to support Kenya, provided the country addresses issues like budget discipline and fiscal reforms.
As the government prepares the 2025/26 budget, it plans to prioritise essential spending, cut waste, and improve the efficiency of public funds usage, aiming for a zero-deficit budget.
The full details of the Finance Bill 2025 are expected to be released in the coming weeks.