As Kenya heads into the reading of its 2025/26 fiscal budget, the macroeconomic signals offer a complicated picture at once calm on the surface, yet troubled beneath. The headline news is encouraging: inflation in May 2025 dropped to 3.8%, down from 4.1% in April and well within the Central Bank of Kenya’s target band of 2.5%–7.5%. But dig a little deeper and it’s clear that this price stability is not being underpinned by robust economic activity. it’s a sign of constrained demand, business uncertainty, and tight credit conditions.
In many countries, falling inflation is greeted as a win. For Kenya, however, the low inflation is not the result of booming productivity or increased supply capacity. Instead, it reflects weak household consumption and subdued private sector activity. Consumers are cautious, businesses are hesitant to invest, and high lending rates are deterring borrowing.
The Purchasing Managers’ Index (PMI) a key gauge of business activity fell to 49.6 in May, marking the first contraction in seven months. Construction, retail and services are slowing, despite modest gains in agriculture and manufacturing.
This comes on the back of the World Bank’s downgrade of Kenya’s 2025 growth forecast to 4.5%, from 5.2%. According to the Bank, rising public debt (now at 65.5% of GDP), declining private credit and a harsh borrowing environment are hampering Kenya’s recovery prospects.
Kenya’s fiscal space is narrowing. Domestic borrowing has ballooned, putting pressure on interest rates and crowding out private sector investment. Fiscal consolidation is necessary, but austerity in a slowing economy can be risky.
Credit to the private sector contracted by -1.4% in late 2024, and the effects are being felt across value chains from startups to manufacturing firms. With fewer businesses accessing financing, job creation is stalling, and tax revenues are underperforming.
Kenya is not insulated from global economic headwinds: oil price volatility, geopolitical disruptions, and global interest rate hikes are impacting trade and foreign exchange. The Kenyan shilling has stabilized recently, but pressure could mount again if capital outflows resume.
As Parliamentarians deliberate the national budget, there’s a vital opportunity to pivot toward sustainable, inclusive economic recovery. Here’s what should top their agenda:
Strengthen Fiscal Discipline Without Choking Growth
- Cap the fiscal deficit at the proposed 4.5% of GDP, as a signal of commitment to macroeconomic stability.
- Focus public spending on productive sectors—infrastructure, agriculture and energy that have high multiplier effects.
Unlock the Private Sector
- Work with the Central Bank and Treasury to lower the cost of credit, especially for SMEs.
- Fast-track payment of government arrears to local contractors and suppliers to inject liquidity into the economy.
Reform Domestic Revenue Mobilization
- Introduce progressive tax reforms that broaden the tax base without disproportionately affecting low-income households.
- Strengthen the Kenya Revenue Authority’s compliance and enforcement mechanisms, including through digital platforms.
Diversify the Economic Base
- Support value addition in agriculture and local manufacturing to boost exports and reduce import dependence.
- Invest in renewable energy, ICT, and the creative economy as new engines of growth.
Communicate Policy with Clarity and Consistency
- Economic uncertainty breeds hesitation. Parliament must demand transparent, well-communicated policies that restore investor and consumer confidence.
- Engage with civil society, academia, and business to ensure inclusive decision-making.
Kenya’s current inflation levels may seem manageable on paper, but they mask deeper vulnerabilities that must be addressed decisively. Parliament has a critical role in ensuring that fiscal policy is not just balanced, but strategically targeted to support recovery, safeguard livelihoods and lay the groundwork for future growth.
The 2025/26 budget should be more than a financial plan. It must be a statement of vision and commitment to inclusive prosperity. The time to act is now.
Do you have ideas on how Parliament can better support private sector growth or improve tax equity? Join the conversation.
