NAIROBI, Kenya, July 28 – Kenya’s external liquidity pressure has eased following an early repayment of a $2 billion Eurobond in February last year.
International credit rating agency Fitch also cited steady foreign inflows and the Central Bank’s interventions that helped push reserves to $11.1 billion by the end of June.
“Kenya’s diversified economy and policy reforms have supported a recovery in investor confidence,” Fitch stated.
However, the agency warned that ‘weak governance indicators, rising debt costs, and revenue mobilization constraints’ remain key risks.
Fitch projects the fiscal deficit will hit 5.2 percent of GDP in the 2025/26 fiscal year (FY), missing the National Treasury’s target of 4.7 percent.
Debt servicing costs are expected to rise sharply, with the interest-to-revenue ratio climbing to 33 percent, significantly above the 15 percent median for similarly rated peers.
According to Treasury forecasts, revenue is expected to rise to 17.5 percent of GDP in 2025/26 FY, up from 17 percent in the current year, while expenditure is projected to decline to 22 percent of GDP.
However, Fitch remains cautious, projecting revenue will only reach 17.2 percent, citing Kenya’s persistent shortfalls and weaknesses in public financial management.
The Finance Act 2025, which avoided introducing new taxes, instead seeks to enhance tax compliance through digitization and reduction of tax exemptions.
Fitch, however, sees limited gains from the reforms, warning that implementation challenges and revenue leakages may undermine progress.
Treasury also plans to finance the 2025/26 FY budget through a mix of domestic and external borrowing, targeting Sh655 billion in total borrowing.
Of this, about $5 billion (roughly 3 percent of GDP) will come from foreign sources, including concessional loans from the World Bank and African Development Bank, although no IMF support is expected following cancellation of the country’s program.
Despite mounting fiscal pressure, Kenya’s real GDP is expected to grow by 4.9 percent in 2025, driven by stronger private sector activity and easing inflation, which stood at 4.5 percent in 2024.
Fitch warned that further rating action would depend on Kenya’s ability to sustain external buffers and achieve meaningful fiscal consolidation.
“A sharp decline in reserves or failure to narrow the fiscal deficit could trigger a downgrade,” the agency said.
Conversely, enhanced revenue performance and a declining debt burden could pave the way for a positive outlook.
